Shutterfly (NASDAQ:SFLY) may be flying close to the sun, but those aren't wings of wax.

Shares of the online photography specialist took a hit in after-hours trading last night on concerns that margins will contract in the seasonally significant fourth quarter.

Taking a quick peek at the company's guidance, you wouldn't think that anything was amiss.

Fourth-Quarter Outlook


$90.5 million to $93.5 million

Gross Margins

58% to 60%

Adjusted EBITDA Margins

32% to 34%

This is the quarter that matters for Shutterfly. It's when folks order their photographic Christmas cards and personalized keepsakes as gifts. To get a clearer sense of the disappointment, one has to stack up the guidance to last year's showing.

Growing its top line by 38% to 42% is nice. However, you will find that gross margins and adjusted EBITDA margins clocked in at 60.3% and 34.9%, respectively, last year. Shouldn't margins -- especially EBITDA margins -- be growing as the company gets bigger?

That's the rub, but the shares falling 11% last night appears to be an overreaction.

The third-quarter financials are certainly encouraging. Revenue rose by 54% to $32.6 million, powered by a 33% increase in orders and a 15% increase in the average size of the order. This is happening because more people are relying on Shutterfly for its popular photobooks, which naturally cost more than run-of-the-mill print development.

The company posted a loss of $0.14 a share, but that's fine. Shutterfly is a company that lives and dies in the fourth quarter, when revenue will almost triple from the previous quarter. Besides, the analysts were expecting the company to lose $0.16 a share on $31 million in revenue.

So what's the deal? The guidance isn't that bad, is it? It isn't. The company also has some potential catalysts cooking this quarter, given its launch of Halloween-related products, a partnership with Target (NYSE:TGT), and teaming up with Martha Stewart Living (NYSE:MSO) for crafty new photobook designs.

The fear may be that Shutterfly will have to discount prices this season. After all, Zazzle has been making an early push to matter this year in photographic holiday cards. It's also impossible to ignore American Greetings' (NYSE:AM) move to acquire CNET's (NASDAQ:CNET) WebShots last week. Why would American Greetings spend $45 million on a photo-sharing site if it didn't see monetization in personalized snapshots as a greeting card tool? You also have firms like Kodak (NYSE:EK) and Hewlett-Packard's (NYSE:HPQ) Snapfish that can't ignore the healthy growth at Shutterfly.

In short, it's going to be a telltale quarter for Shutterfly. However, after seeing its shares more than double since last year's IPO, the cynics are only getting more jaded. Take off the lens cap and aim well, Shutterfly. Shoot them before they shoot you.

Shoot and click:

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.