Market-beating shares generally achieve this quietly, as is the case with stock-image firm Shutterstock (SSTK 8.50%). It could solely be outperforming the S&P 500 by a slim margin, however as of this writing, it is up about 196% since its preliminary public providing (IPO) in 2012, in comparison with a return of 179% for the market.
Many buyers consider that pictures created by synthetic intelligence (AI) pose a fabric risk to the long-term viability of Shutterstock’s enterprise. And which will really be true, however the firm appears to be making the neatest play it might probably, given the playing cards it has been dealt: embrace AI-generated content material.
Shutterstock’s bread and butter
Shutterstock is the form of enterprise I like: a market promoting third-party stuff. What’s nice about these companies is they will get pleasure from very excessive revenue margins, as a result of they are not producing or sourcing the product however offering {the marketplace} the place patrons and sellers join.
And certainly, Shutterstock is a high-margin enterprise. Its gross margin is persistently over 60%. And its working margin has been over 10% in recent times, which is pretty in step with its historic norms when zooming out far sufficient, because the chart under reveals.
Knowledge by YCharts.
In my view, market companies earn enviable margins, as a result of they first should overcome one main problem: getting the flywheel spinning. Naturally, sellers solely wish to go to the place the patrons are. And patrons solely wish to store the place they’ve essentially the most choices. It is a chicken-and-the-egg situation in that it is laborious to draw one group with out already having the opposite.
Within the third quarter of 2022, Shutterstock reported 607,000 subscribers to its numerous content-licensing platforms. Because of acquisitions, that is a lot increased than the 368,000 subscribers it had on the finish of the earlier quarter, however subscribers have been steadily rising earlier than these acquisitions as effectively.
Furthermore, Shutterstock ended the quarter with over 424 million pictures accessible for obtain, up 9% yr over yr. And its video-footage assortment was up 17%.
In brief, the corporate seems to be prefer it has the spinning flywheel that each one marketplaces want, which is sweet. Nevertheless, AI-generated content material threatens to disrupt the whole enterprise.
How Shutterstock is embracing AI (and why)
AI is front-and-center on buyers’ minds due to OpenAI’s ChatGPT. The text-generation utility is a viral sensation on social media. However past the thrill, the underlying tech is spectacular sufficient to draw the eye of Microsoft, with the tech large investing $10 billion in OpenAI.
In addition to simply textual content, AI-generated pictures are going viral as effectively, together with pictures generated by OpenAI’s Dall-E utility. In concept, it could be faster and cheaper to generate a picture with AI than to go to Shutterstock to license one, which is what buyers are getting nervous about.
Nevertheless, folks usually neglect that AI works by ingesting massive datasets. Subsequently, in relation to AI-generated pictures, the place does the info come from within the first place? And therein lies a rising controversy.
There’s at the moment a category motion lawsuit towards Microsoft, OpenAI, and different AI firms. Mainly, the argument is that AI makes use of actual pictures to create its art-generation fashions. In different phrases, artists are unwillingly supplying the info that is coaching their AI competitors.
Legally, I haven’t got any clue the place this might go. However virtually, I think about that AI-generated artwork is right here to remain, for higher or for worse. And that is why Shutterstock is wise to embrace the change in a approach that advantages its group of artists. Keep in mind: It may well’t afford to lose this important facet of the flywheel.
Shutterstock additionally wants to supply AI-generated artwork to patrons or danger dropping them.
In October, Shutterstock signed a take care of OpenAI. OpenAI licenses pictures from Shutterstock to coach its Dall-E utility. With its new deal, Shutterstock patrons can come to the platform and generate AI artwork. However the artists contributing the info to the AI fashions nonetheless get compensated. This places Shutterstock on the fitting facet of the rising controversy, in my view.
There’s far more that might must be thought of to construct an funding thesis for Shutterstock inventory. Subsequently, I’d suggest digging extra into the corporate earlier than shopping for.
Nevertheless, shares of Shutterstock will doubtless fall long run if its enterprise mannequin will get utterly disrupted by AI. That stated, the corporate seems to be making the most effective strikes it might probably to get forward of the curve, which must be encouraging for shareholders.
