Generative artificial intelligence (AI) applications are talking the world by storm. And rather than fight it, stock image company Shutterstock (SSTK -1.43%) is embracing change with both arms.
On July 11, Shutterstock announced a six-year partnership with OpenAI -- the high-flying company behind ChatGPT and Dall-E. Under the terms of the partnership, OpenAI will train its AI image-creation software using Shutterstock's enormous database. And Shutterstock users will have enhanced features powered by OpenAI.
There's plenty of controversy around generative AI applications and the path forward is complicated. The question, therefore, is whether Shutterstock is making the right move to create long-term value for its shareholders.
The controversy with generative AI
On July 7, comedian Sarah Silverman filed suit against OpenAI. In 2010, Silverman wrote a book, which her suit claims was used by OpenAI in building its AI models, despite being copyrighted material.
It's not OpenAI's first lawsuit. There have been multiple class action lawsuits against the AI start-up in 2023, all questioning where and how it gets its data.
Generative AI applications need data. For example, with AI tools for image creation, users can ask it to create an image of a monkey riding a banana boat in the style of Leonardo da Vinci (or whatever) and the application will spit out something like that. But to do this, the AI needs to first be trained with image data for monkeys, bananas, boats, and paintings by da Vinci.
AI needs enormous datasets to function. And the lawsuits against OpenAI allege that these generative AI applications are building their datasets from copyrighted material.
How Shutterstock is moving forward
The obvious issue is one of proper compensation. For example, a photographer could put photos or videos online to make money. But generative AI image applications might access these images and add them to its dataset. Users could then create images based on the photographer's copyrighted images and make money from them, but the original photographer wouldn't see a dime. And that's a problem.
Shutterstock is a marketplace platform -- it needs both content contributors and paying subscribers. And when it first partnered with OpenAI in 2022, before the AI craze really got going, it was trying to save its business model.
As of the end of the first quarter of 2023, there were 615 million images uploaded on Shutterstock's platform. This is how the company has amassed 559,000 subscribers -- they're there for the vast content library. Therefore, the company needs to keep contributors happy or risk having these third parties take their images elsewhere.
The problem is that Shutterstock also risks losing paying subscribers as generative AI grows. People increasingly want the features these other applications provide -- it looks like it could be the future of stock photography. Therefore, Shutterstock can't sit back and expect the old ways to continue to work.
But as already stated, it can't risk upsetting its contributor network in the process. It needs to keep both parties happy, which is why I believe that embracing change through its OpenAI partnership is the way to go.
Is Shutterstock stock a buy?
Trading at almost its lowest price-to-earnings ratio ever and its highest dividend yield ever, as shown in the chart below, expectations are clearly low for Shutterstock stock right now. And stocks with low expectations can be great investments if the business pleasantly surprises.
SSTK PE Ratio data by YCharts
In my view, Shutterstock is playing its only logical hand. Walt Disney couldn't stop computer-generated animation from replacing hand-drawn images any more than the music industry could stop the advent of MP3s. In the same way, if generative AI is the future of stock photography, Shutterstock can't change that.
As the lawsuits suggest, perhaps there is need for regulatory oversight to ensure that all parties are properly compensated -- that often happens during times of rapid disruption. And as I see it, Shutterstock is ahead of the curve in this regard. In its original partnership with OpenAI, management said it was so that "Shutterstock contributors will be compensated for the role their content played in the development of this technology."
On the positive side, OpenAI is the biggest name in AI applications right now and those new tools will be on Shutterstock. That could be an enticing selling point to would-be subscribers, perhaps providing an avenue for growth.
However, it doesn't appear that the growth will manifest itself this year.
In 2023, Shutterstock only expects 2% to 3% top-line growth -- and it will likely need better growth than this in the future if it's going to beat the market over the long term. In other words, the stock isn't a clear buy right now.
However, there is market-beating upside for Shutterstock stock if its growth improves. It's also cheap enough to believe its downside is limited from here. And by partnering with OpenAI, I believe it's taking the best move possible to save and potentially grow its business in the changing operating landscape.
As Amazon CEO Andy Jassy recently wrote: "When you see [change] coming, you have to embrace it. And, the companies that do this well over a long period of time usually succeed."
