Shutterfly, the online photo site based in Silicon Valley (Redwood City) is pursuing a sale or possible initial public offering, the Wall Street Journal reports, citing sources — in a deal targeted at $400 million to $500 million.

It is about time, as this venture-backed company has been profitable for three years, Jeff Housenbold told us in a conversation a few months ago (the WSJ estimates profits are at $20 million, which is good stuff for this shaky sector). The industry is going through bewildering change, with upstarts like Flickr and others taking market-share from the older guys. Photobucket has got a lot of momentum too.

Shutterfly has real assets, including a manufacturing plant in Hayward, where half its employees are (most of Shutterfly’s competitors, including HP/Snapfish, Apple, and AOL rely on outsourcing), and the company focuses on high-end things like album creation.

The news comes as Hewlett-Packard upgrades its Photosmart Studio, a new touch-screen kiosk in retail stores that can transform your digital photos into calendars, albums and the like — instantly, while you are standing in line. While Shutterfly has been offering photo merchandise for years, customers usually have to wait several days to receive their personalized products. This HP move offers instant gratification, as Merc colleague Nicole Wong writes today.

We tried reaching Shutterfly several hours ago, to get their response to these latest reports and developments, but haven’t heard back from them yet.

We mentioned our conversation with Shutterfly’s Housenbold, in which he describes the bloody noses “thousands” of photo-sharing sites have received over the years.

Shutterfly is backed by Jim Clark, co-founder of Internet Netscape, along with Mohr Davidow Ventures and others.

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