Anyone remember Shutterstock (SSTK 0.71%)? The marketplace for digital pictures, video, and music -- which became a public company via IPO in 2012 -- had a heyday in the early days of the pandemic. Shares of the company skyrocketed, only to come crashing back down as the economy normalized and a bear market ensued in 2022.
But Shutterstock is at it again, this time trying to leverage the dawn of generative AI services like ChatGPT to its advantage. At Nvidia's (NVDA 1.18%) March 2023 technology conference, Shutterstock said it's using Nvidia cloud software (powered by their leading semiconductor systems) to create a new 3D rendering tool for creators. Could Shutterstock stock be a buy?
3D to be a new cash cow for artists?
Shutterstock makes money by offering a repository of stock images, video, and music that can be used in digital media. The company also provides editing software for content creators. Shutterstock competes against Adobe (NASDAQ: ADBE) Stock and Getty Images Holdings (NYSE: GETY).
To bolster its competitiveness, Shutterstock is launching a new text-to-3D AI feature on its editing software called "Creative Flow." The service will allow creators to describe an object in simple text, and Creative Flow (powered by Nvidia's Picasso generative AI service) will convert the description into a digital 3D model.
Currently, 3D modeling is a time-intensive task for creators. But new services like this could greatly accelerate the process across industries, from video game development to marketing to industrial design and simulation. Shutterstock will also make the service available on its 3D objects marketplace Turbosquid.com, and will also be integrated into Nvidia's Omniverse platform.
As is the case with all generative AI, a massive amount of existing artistic works will be fed into the software to "train" it on how to build models from simple text. Shutterstock will provide some of this content to feed the AI, and says it will compensate artists via its Contributor Fund.
Shutterstock needs to excel at one more thing...
The benefits of this deal are pretty straightforward for Nvidia (it gets a new cloud customer for its expanding software business), and Shutterstock gets a new toy to offer customers (although Adobe also announced new generative AI powers using Nvidia at GTC in March).
Shutterstock stock has been showing signs of life again so far in 2023, and getting aboard the generative AI hype train will no doubt attract some investor attention.
Indeed, one interesting little tidbit that could add fuel to the fire is that Shutterstock is no loss-generating upstart AI software company. It has been steadily growing its sales, and doing so profitably, for years now. The company is in the black both on a GAAP net income and free cash flow basis.
Data by YCharts.
Shutterstock's revenue increased 7% year over year in 2022 to $828 million (or up 11% when excluding negative effects from currency exchange rates). By some metrics, if Shutterstock can sustain its growth, the current valuation might appear attractive to some investors. Shares trade for 35 times trailing 12-month earnings per share, or 27 times trailing 12-month free cash flow.
However, though Shutterstock has been growing its revenue at a consistent clip, net income and free cash flow generation haven't been rising. It's expensive to keep up with larger peers like Adobe on the technological front, and a new partnership with Nvidia is no doubt going to cost some money to develop and market too.
I wouldn't be so quick to invest in Shutterstock at this juncture given this dynamic. Nevertheless, if you believe 3D digital content is the future, it could pay to keep tabs on Shutterstock's progress on its new partnership with Nvidia.
