On Monday, Needham analysts adjusted their outlook on Shutterstock (NYSE: NYSE:SSTK), and continued endoring the stock with a Buy rating.
The revision follows the announcement of the merger between Shutterstock and Getty Images (GETY), a deal that is anticipated to create a combined entity with a more extensive content library and potential cost savings.
The analysts reduced the price target to $45 from the previous $55. They believe that the merged company, referred to as NewCo, will benefit from significant free cash flow (FCF) generation, which should be a focal point once the deal is finalized.
The aim for NewCo would be to concentrate on paying down debt, thereby reducing interest expenses and further increasing FCF. Despite this positive outlook, there is acknowledgment of the challenges ahead.
The near-term risk-reward profile is considered broad, as the market’s valuation of NewCo could be adversely affected by Shutterstock's ongoing decline in organic content.
The transaction has raised some concerns about the immediate future of the business. Nonetheless, Needham analysts recognize that even their base scenario does not project a return to organic growth for Shutterstock's content until 2026. This suggests that there could be an extended period, potentially lasting another year, where the standalone Shutterstock might be valued at a depressed multiple.
The analysts' commentary highlighted the strategic benefits of the merger, pointing out the enhanced content library and cost synergies as key advantages for the combined company. They also emphasized the importance of NewCo's ability to generate free cash flow and the strategy to reduce debt as crucial steps in strengthening the company's financial position.
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