Oversold Shutterstock Hits Bottom: AI For Income Investors

Key Points

• Shutterstock inks new deal with OpenAI that will help drive results for years. 
• The company is leaning hard toward AI and will add AI functionality to Giphy. 
• Analysts see a substantial upside for the stock, which is on the cusp of a reversal. 

The market for Shutterstock NASDAQ: SSTK stock is down 60% from its highs, but the bottom is finally in. The stock is among the most over-sold on Wall Street and shows signs of a budding reversal that could send the market back to its pandemically-inspired highs. The latest news confirms a trend of releases that point to 1 thing: Shutterstock is taking the AI game seriously and positioning itself to capitalize on it.

There are gains to be made based on the outlook for AI-powered services. AI is estimated to be worth around $50 billion this year and will grow at a 50% CAGR through the decade's end. The market will reach $2.25 trillion in the early 2030s, and services will be the largest slice of the pie. 

The latest news is an extended deal with OpenAI. The new deal extends the previous by 6 years and expands it to additional data resources. OpenAI will have expanded access to images, videos, and music for AI-training purposes, and there is an interchange as well. OpenAI will help Shutterstock embed AI functionality into the new Giphy purchase, which should help drive the use of Giphy and Shutterstock services. 

Shutterstock bought Giphy from Meta NASDAQ: META for $53 million. This is a considerable loss for the Facebook parent but alleviates antitrust violations in the UK. Shutterstock execs view Giphy’s 1.7 million average daily users as an in into the mainstream market for its, until now, business-centric services.

The idea is that expanding the use and functionality of social media will drive more use of Shutterstock images, media, and services. Additional benefits are cross-platform partnerships with Facebook, WhatsApp, and Microsoft NASDAQ: MSFT, to name a few. 

The Analysts See Double-Digit Upside For Shutterstock 

Needham recently pointed out Shutterstock as a potential sleeper-win in the AI space. In their view, Shutterstock has the widest risk-to-reward profile in AI due to the potential for new business streams and market share gains in the core business. Needham is 1 of 5 analysts tracked by Marketbeat with a current rating, and they have the stock pegged at Buy with a price target of $90.

That’s above the $87 consensus figure and well below last year’s consensus but still a solid 65% above the current action. Even the low price target, set this year, assumes a double-digit upside, and upward revisions may be coming. 

The company is expected to post YOY growth when it reports Q2 earnings later this month. The analysts have lowered their targets over the past month, so the bar is low. However, the takeaway is that increased guidance may compound outperformance due to the surge in AI interest. This company stands to benefit from new revenue streams relating to the AI industry and AI services for the mass market.

The real question is whether Shutterstock can make money, and it does. The company also returns capital to shareholders through a dividend income investors will like. The stock yields more than 2.2%, with shares trading near long-term lows, and the payout is reliable. The payout ratio is a low 23% of the earnings outlook, and the balance sheet is a fortress. 

The Technical Outlook: Shutterstock Bottoms, Reversal Is Next 

The Shutterstock market hit bottom late last year and retested it again in spring 2023. That resulted in a solid bounce driven by the OpenAI news, which should get the market up to $60 or higher.

The question is if the stock can regain support at the 150-day moving average. If so, it will likely complete the reversal and return to the top of the trading range near $80. If not, this stock could continue to wallow at current levels or move lower until results show clear improvement related to AI.