By Craig Giammona
FORTUNE -- It's typically not a good sign when a CEO dumps stock in his own company. But last month, when Shutterstock's Jon Oringer sold 2.5 million shares of the stock photo firm he founded as part of a larger secondary offering, the company's stock rose sharply, jumping 17% to trade above $70.
It was a testament to investor demand for shares in the New York-based company, which went public just over a year ago and has seen its stock price rise 240% on the strength of growing sales of digital pictures and video. Shutterstock (SSTK) has beaten expectations each quarter since its IPO and has a market capitalization approaching $2.5 billion. But the stock isn't cheap. It trades with a trailing price-to-earnings ratio of 45 (Google's (GOOG) trailing P/E is 28; Apple (AAPL) trades at 12), and analysts expect that ratio to climb to nearly 65 by the end of 2014.
Analysts say demand for Shutterstock shares are due in large part to investors looking for a "quality story" in the mid-size technology space. The question is whether or not the company can deliver on the market's expectations of steady growth in revenue and earnings.
"They've definitely set a high bar for themselves," says Andre Sequin, an equity analyst at RBC Capital Markets. "There's an expectation in the investor class that the growth rate is going to be pretty significant."
Shutterstock's digital library has grown to 30 million photographs, and it sells three photos each second at an average of $2.33 per photo. Vetted contributors constantly send in photos and receive 30% of the sale price when their photos are purchased.
Shutterstock finished 2012 with gross profit of $105 million on sales of $169 million, a 40% percent profit jump over 2011. This year, revenue and profit have ticked steadily upward. And Shutterstock recently inked a deal with Facebook (FB) to let advertisers use its photos and is expanding its catalog of stock video. The company is also growing its international business. In 2012, 72% of Shutterstock sales came from outside the U.S. (European sales totaled $62.9 million in 2012, compared to $60 million in the U.S. and $46.7 million from the rest of the world), and the company is now translating its website into 20 languages.
The case for Shutterstock's continued growth is fairly straightforward. As broadband Internet expands, more and more people (read: bloggers, companies, entrepreneurs) are making their way online across the world. With more people visiting websites on mobile devices like phones and tablets, the demand for pictures and videos has grown exponentially. Most marketers don't even send an email without a photo these days, analysts say, and companies have grown increasingly demanding about the appearance of their websites.
"With the migration to mobile, digital content is getting increasingly visual," says Rebecca Lieb, a digital media analyst at the Altimeter Group. "Everything written we see diminishing and everything visual is absolutely booming. As long as that trend continues, and I see it continuing for at least five years, the prospects [for Shutterstock] are very, very good."
Shutterstock gained market share by disrupting the business model of higher-priced Getty Images, and took off as the demand for digital photographs surged over the last few years. Oringer thinks the same will happen with videos, which sell at much higher prices than still photos. Shutterstock started building its video library in 2006 and has seen sales double in the second quarter compared with the same period in 2012.
"I feel like we're just getting started in a lot of ways," Oringer says. "There's a long runway ahead of us."
Oringer launched Shutterstock in 2003 because he knew first-hand how difficult it was to find quality stock images for marketing materials. He'd run into the issue as he tried to build a business selling pop-up blockers and privacy protection software in the early 2000s. Oringer built Shutterstock largely without outside funding and maintained control of the company after its IPO. Even after the recent stock sale, Oringer still owns nearly 16 million shares of the company, a stake that has made him a billionaire.
To stay competitive, analysts say Shutterstock will need to continue to grow its library of stock video and photos. Shutterstock has risen ahead of rivals such as Corbis and Fotolia by building its archive. Fashion and tastes are constantly evolving, and the photos needed for advertisements and online marketing have to keep up with the trends. Operating in international markets is also demanding: When a Japanese company wants a photo of businessmen shaking hands, they often want to feature Japanese hands. And that photo won't necessarily work for a Belgian company.
"You have to be regionally relevant," says RBC's Sequin. "They've grown their image base much more quickly than ... others; that's where they've managed to pull ahead of some of their competitors."
The demand for digital images and video will continue to grow, particularly in emerging markets, and Shutterstock is in a position to capitalize on that growth. But it's a fast-moving marketplace. A new company, with a new idea for online stock images, could very well be on the verge of launching. Or maybe it already has. Shutterstock was born as a low-cost disruptor, but its continued growth may depend on how well it fends off challenges that will inevitably come from the low end of the market.
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