Getty Images: Interest Payments Eat Up Revenues (NYSE:GETY)

Investment Thesis

I think Getty Images Holdings (NYSE:GETY) does not have a unique selling point, and its service is significantly more expensive than the competition. Furthermore, numerous websites offer almost as good quality for free. In the future, the entire industry will face significant competition from ever-improving AI image generators, which have made enormous progress in the last year alone. In addition, the company has a lot of debt, and interest payments amount to a quarter of the revenue. Given all these aspects, I think the valuation is significantly too high.

Company Overview

Getty Images has been a digital media content company for over 25 years. It has over 200 million photos, illustrations, and videos ready to use for commercial purposes.

One thing I noticed immediately on gettyimages.com is the incredibly high prices. I have experience in this field, and I am currently running a small side project, including royalty-free images. And honestly, I have no idea how the company justifies such prices and why someone pays so much.

Here is an example of a simple picture of a mushroom that costs $500. On pixabay.com, there are a lot of high-quality mushroom pictures for free. istockphoto.com, which is also part of the company’s network, is a bit cheaper but still expensive for my taste because there are other websites where you pay a subscription fee and can use as many images as you want.

In addition, all these websites will get more and more competition from AI-generated images. Every content creator will be able to create their own photos quickly and easily in the future. The results are already excellent, and the improvements are extremely fast. I would not have mentioned this point only a year ago because the quality was much worse. But, now the results are much better, and I think it will take one or two years more until truly photorealistic images are possible, which can hardly be distinguished from real photos. And it will only be a matter of time until the same is possible with videos. From my point of view, Midjourney is currently the best for pictures; and it’s a lot of fun to play around with. On YouTube, there are also lots of tutorials on how people use it to create exactly the images they need for the style of their website.

Valuation

The company is currently valued at an enterprise value of $3.44B. The market cap is $2.01B, and the total debt is $1.45B. Since the IPO was not long ago, there is not much historical data we can compare with, and tools like YCharts and Fastgraphs do not work here.

What we can see, however, is that revenue growth has been relatively slow since 2020. Revenue was $815M, and this year, while there is still a quarter to go, should end up around $936M. So, of course, there is some growth, but considering that this was an extraordinary time for internet companies – work from home, pandemic – the growth doesn’t look very impressive.

We can also see that the company has clearly not reached its EPS expectations in the past two quarters. However, the estimates still state that EPS earnings of $0.01 are expected for 2022. But it doesn’t look like this target will be reached; moreover, there have already been two EPS revisions downwards. Moreover, these are non-GAAP numbers. The EPS on GAAP basis look even worse and was -$0.51 in Q3. To be fair, EPS was positive in Q2, and there were some major adjustments in Q3. Nevertheless, it does not look as if there will be a profit at the end of this year.

This result included a $161.3 million net loss on fair value adjustment for the warrant liabilities, which is nondeductible for tax purposes and will also impact our effective tax rate in 2022.

Q3 results

If we look at the income statement, we see that sales are stagnating. The gross profit is even slightly declining. At least the operating costs have remained the same as well. Nevertheless, it has to be said that the overall figures do not indicate rapid growth.

Cash & Debt

The cash from the IPO is evaporating very quickly. As there was a significant one-off effect in Q3, it remains to be seen how cash reserves will develop further. Given the debt level and the fact that the company is not yet clearly profitable, cash reserves will tend to become smaller rather than larger. Therefore, I think it is likely that the company will issue more shares to increase its capital.

However, the company has reduced its liabilities in the past quarters. The long-term debt decreased from $1.7B to $1.4B. But still, the debt is very high in relation to the market capitalization. The result of this is higher interest payments. In the last quarter alone, interest payments amounted to a quarter of sales. This puts the company in a situation that many companies find themselves in that have taken on too much debt at low-interest rates but are not yet clearly profitable. Rising interest rates mean higher interest payments, which could mean no positive cash flow is left to reduce the debt. So if the actual business stagnates forever (which is currently the case for this company), how can the company break out of this vicious circle? One way would be to issue new shares to reduce the debt. We will see if this path is taken.

Risks

Since I think the stock is a good short candidate, the risks should instead be the risks to my view.

Of course, the company has a scalable business model. That means if the company manages to generate more paying customers (and this number has grown in recent years), the company has the opportunity to generate high margins. For example, competitor Shutterstock (SSTK) has a gross profit margin of 63% and a net income margin of 10%. Both companies have relatively similar revenues and market capitalization. The most significant difference is Shutterstock’s non-existent debt. Thus, Shutterstock is significantly more profitable and also pays a dividend.

I don’t think Getty is an attractive takeover candidate at the current valuation and debt, but it could eventually become one. Because who uploads to Getty Images commits to exclusivity, the images and videos may not be uploaded to other sites, so the website has exclusive assets. At iStocks, however, the uploads are non-exclusive, which usually leads to contributors uploading their pictures and videos to other sites.

Those who decide, like me, to short the stock must, of course, consider the general risks. Firstly, a short sale is not free, but you pay a fee for borrowing shares. How high this is should always be checked beforehand. Furthermore, there is a theoretically unlimited risk of loss, which is why I recommend working with stops. In case of low liquidity or sudden movements, these may not save you from larger losses, as we have seen in the past with large short squeezes.

Share Dilution and Insider Selling

I always want to look at stock dilution and whether there is insider selling. I have not been able to find any information about insider sales. Since the IPO was only in July last year, there is not enough information to identify the trend of outstanding shares and stock-based compensations.

Conclusion

I think it is pretty likely that the company will issue new shares to use the money raised to reduce debt or to invest in other ways. However, given the slow growth, the high level of debt, rising interest costs, the many competitors, and future competition from AI images and videos, the company is not an investment from my point of view.