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A few weeks after a rather lackluster debut on the public markets,


(SFLY) - Get Shutterfly, Inc. Report

is coming into a sharper focus, and investors seem to like what they are seeing.

Since Tuesday afternoon when Shutterfly announced third-quarter earnings, the stock has rallied to $14.80 in recent trading Monday, a rise of nearly 23% that left it 20 cents shy of its $15-a-share offering price.

Investors who bought Shutterfly shares in the late-September IPO had to be encouraged by that performance, while newer investors appear to be encouraged by both the third-quarter reports -- one of those widening-losses-but-not-as-wide-as-feared affairs that Wall Street is tolerating again -- as well as more encouraging longer-term metrics unearthed in reports from two of the three main underwriters.

The day after that earnings report, Jefferies analyst Youssef Squali started his coverage of Shutterfly with a buy rating and a $16 price target, while JPMorgan analyst Imran Kahn initiated coverage with an overweight rating. The two, along with Piper Jaffray, were the three lead underwriters of Shutterfly's stock offering.

Shutterfly posted a healthy 36% increase in revenue in the quarter to $21.2 million, with revenue from prints rising 14% to $13.5 million and revenue from nonprint products, such as photo books, calendars and greeting cards surging 102% to $7.7 million.

That's important because print revenue -- photos that Shutterfly prints and sends to customers -- relies heavily on 4" x 6" photos, which are quickly dropping in price due to rising competition among online-photo and printing services. Shutterfly slashed the list price for 4" by 6" photos 34%, from 29 cents per photo to 19 cents.

Shutterfly also invested in strategic partnerships to better market its print and nonprint products, notably an offer for photo books to the million U.S. travelers who annually apply for passports through the post office, and another with Scholastic Books, offering photo books with themes tied to the ever-popular Clifford the Big Red Dog and Thomas the Tank Engine, and still others with retail sites like

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So, while the overall growth of Shutterfly seems solid, there remains concern about how much it's costing the company to get there. Operating expenses grew faster than revenue in the quarter: Technology expenses were up 34% to $5 million, sales and marketing rose 44% to $5.4 million, and general and administrative expenses were up 81% to $5.1 million.

That pushed Shutterfly's operating loss in the quarter to $5.1 million, equal to 24% of revenue in the third quarter, wider than $1.5 million, which was equal 10% of revenue, a year ago.

Why, then, are investors bidding up a stock of a company that is pouring on the spending in an industry where growing competition is forcing prices down? That's where the analysts come in. Shutterfly, they argue, has a strong, loyal customer base of middle-class, middle-American families.

This customer is likely to be female (84%), not terribly tech-savvy, but comfortable online, and looking for an easy, cheap way to get digital photos developed fast. It's today's equivalent of the Kodak or Polaroid consumer of generations past.

Shutterfly is angling to become the Kodak or the Polaroid of the 21st century -- the go-to place for manufacturing memories.

The market for online-photo orders is expected to grow to $1.9 billion in 2010 from $424 million last year, according to the Greeting Card Association. "As a quality-focused premium brand with a loyal customer base, and the only large pure-play in photo-printing, we believe that Shutterfly is well positioned to take advantage of this market opportunity," wrote Jeffries' Squali.

What's more, he said, higher cash flow and, in time, profit, should come along with revenue growth holding above 30%. "Shutterfly has relatively stable gross margins (mid-50%) and a high leverage in its print operations, which should increase further with the addition of print lines in California and a second facility east of the Mississippi," Squali said. "This should help drive top-line growth, profitability and free cash flow over the long-term."

There is something a little queasiness-inducing about an Internet company with growing losses in a crowded sector with underwriters slapping buy ratings on it. But it may not be so simple. Internet analysts can't afford to be the touts they were during the bubble years, and Wall Street remains sober in which stocks it lets through the public gates.

Shutterfly is rising because investor confidence is growing in its longer-term prospects. Now it's up to the company to deliver returns on its generous spending. They'd better, or you may want to take a snapshot of the stock as it approaches its $15 offering price again -- because it could soon become a halcyon memory.