Say cheese!

Every week, I take a snapshot of a company that I believe is going the wrong way. I then proceed to shake it like a Polaroid picture.

I'm not some sadistic shutterbug. I don't rip into a stock unless I can come right back with three more picks that I think will be better portfolio replacements.

Who gets tossed out this week? Come on down, Shutterfly (Nasdaq: SFLY).

A picture trails a thousand words
The online photofinishing specialist reported reasonable quarterly results last week. Revenue soared 27%. It posted a narrower deficit -- and this is still good news, since this is a seasonal business where red ink is typical during the first half of the year.

However, as a loyal Shutterfly subscriber, I haven't placed an order for prints, photobooks, or personalized greeting cards from the company in ages. I blamed Facebook yesterday. As a growing number of family and friends begin sharing digital snapshots on the social-networking site, I no longer had the pressing need to pay for physical keepsakes.

One can argue that Shutterfly gets it. The company actually posted a decline in its prints processing business. The growth here is coming from its personalized products, so apparently there's no shortage of folks ordering photo-customized coffee mugs, desk organizers, and mouse pads.

However, don't get spoiled by the 27% top-line spurt in its latest quarter. It was pitted against last year's horrific freshman quarter. It sees another quarterly loss on 12% to 17% growth during the current quarter. It projects 12% to 16% in revenue growth for all of 2010, which means that we're looking at some serious deceleration as we head into the company's telltale seasonal run.

Even modest growth is good, but this isn't the kind of octane that one would expect from a stock that has nearly doubled over the past year.

What about the bottom line? Surely this scalable business is delivering some serious profit growth? Well, after posting a non-GAAP profit of $0.64 a share last year, Shutterfly's guidance calls for adjusted earnings to clock in between $0.63 and $0.73 a share. In other words, this isn't even at the high end of the range Shutterfly's adjusted profitability is growing in the low teens. The stock closed last night at 34 times the midpoint of its 2010 earnings range, so anything short of a picture-perfect performance is going to be as flattering to this stock as my driver's license snapshot.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new replacements.

  • Hewlett-Packard (NYSE: HPQ) -- In trying to dig up a worthy replacement with some skin in the photofinishing game, I considered Eastman Kodak (NYSE: EK) as a turnaround play. Analysts see it bouncing back into profitability this year, and the stock is trading at a single-digit multiple of the $0.63-a-share profit that it is projected to post. However, Kodak's future beyond that is a lot cloudier (and the average Wall Street estimate calls for red ink next year). HP is a different critter entirely. CEO Mark Hurd has taken a company that had a strong printing division and improved it by beefing up the operating margins in personal computing and other previously forgotten categories. Even if folks aren't printing snapshots the way they used to, HP is making it up elsewhere. I'm also one of the few fans of its move to snap up Palm (Nasdaq: PALM). I think HP will be able to turn webOS into a bigger platform than simply a smartphone base.

  • Vistaprint (Nasdaq: VPRT) -- What Shutterfly is to the local photo developer, Vistaprint is to your neighborhood commercial printer. Vistaprint built its brand by providing cheap business cards, but now specializes in short runs of everything from customized pens to brochures. There is some overlap with Shutterfly -- as both companies are pushing mugs, calendars, and mouse pads -- but Vistaprint walks away as the better investing opportunity. After all, analysts see revenue and earnings growing faster at Vistaprint than Shutterfly this year. However, Vistaprint is the one trading at the lower earnings multiple.

  • Yahoo! (Nasdaq: YHOO) -- Photo-sharing sites are popular ventures for companies with hard goods they would rather sell. Kodak has Kodak Gallery. Shutterfly has Share. American Greetings (NYSE: AM) acquired Webshots from CNET three years ago. The sites may be solid, but there is always a commercialized vibe that saps any community or viral juice out of the venture. Yahoo!'s Flickr is different. It has retained its artistic integrity, even under the watch of a dot-com giant. It's the photo-sharing beast that everyone respects. Anecdotal proof? Shutterfly mentioned Flickr -- twice -- during last week's conference call.

Sorry, Shutterfly. I'll still turn to you the next time I'm in need of a slick photobook, but your valuation as an investment has as many holes as a slice of Swiss.

Say cheese!

Then take our Motley Poll and proceed down the page to flesh out your opinion in the comments box.

Vistaprint is a Motley Fool Rule Breakers pick. Try any of our Foolish newsletter services, free for 30 days.

Longtime Fool contributor Rick Munarriz always takes out the garbage. He does not own shares in any of the stocks in this column. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.