Why Shutterfly Inc. Shares Dropped

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What: Shares of Shutterfly  (NASDAQ: SFLY  ) were fading today, falling as much as 10% after an analyst downgrade. 

So what: The research firm Cowen & Co. lowered its rating on the photo-products website all the way from buy to sell based on poor sales growth. Analyst Kevin Kopelman pointed out that Shutterfly's top-line growth is no longer outgrowing overall e-commerce sales in the U.S., explaining, "Shutterfly grew organic consumer revenue by an estimated 15% in 2013, vs. 17% growth for overall U.S. e-commerce, the first time Shutterfly has not beaten e-commerce industry growth since the company was founded in 1999." He also lowered his price target to $39 from $57.

Now what: Kopelman said that the slowing growth is evidence of increased competition, pricing pressure, and an inability to adapt to mobile technology, where the company generates just 8% of its sales. Judging Shutterfly against a platform as diverse as e-commerce may not be the best way to assess the digital-image vendor, but even assessing it against itself, the company seems to be struggling. Shutterfly's 2013 net income was the lowest it's been in three years, and analysts are expecting a loss this year as the company spends on investments. Top-line growth doesn't seem a concern, but I'd question whether the company will ever deliver on the promise baked into its triple-digit P/E rating.

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