Shutterfly, the Redwood City online photo site, has filed for an initial public offering, something hinted at earlier this week — but its finances don’t look as good as we thought.

To pull off an IPO in this crowded area of online photography, you’d expect Shutterfly to be showing plenty of momentum. A host of growing and hungry competitors, from start-ups like Photobucket to more established players like HP’s Snapfish, appear to be doing well.

But a glance at the Shutterfly’s filing yesterday with the Securities and Exchange Commission shows a net loss of $1.668 million in the first quarter, up from a loss of $683,000 in the same quarter last year (see page 6). Granted, the company makes most of its money in the 4th quarter, and that apparently was enough to make Shutterfly profitable last year, but there’s no explanation — at least, that we see — for the downward drop in the first quarter.

OK, so give them the benefit of the doubt, and assume that higher staffing and administrative costs are the reason — and assume that this company will lose money in every quarter but the 4th quarter.

Still, there are troubling elements. Much of last year’s profit growth came from one-off factors. The company boasts a $28.9 million net profit in 2005, up from break-even the previous years — but then you see (again, on page 6) that more than $24 million comes from a one-time tax benefit, and another $442,000 came from a “change in accounting principles.” BW has a good review of Shutterfly’s books here. BW also suggests that the Wall Street Journal got played by a confidential source when it reported last week that the company’s valuation is targeted at between $400 and $500 million. That translates into a value that is 52 and 65 times last year’s free cash flow, an “unlikely” scenario.

Don’t want to pick on Piper Jaffray, one of the investment bank’s taking Shutterfly public, but it is also one of the banks that took Vonage public, and where investors who bought the stock ended up saying things like this (Vonage Bankers Bent Us Over!), and analysts pointed out things like this (banks earned $31,875,000 in commissions despite the bust). Shutterfly’s IPO is no where near as audacious as Vonage’s. In fact, chief executive Jeffrey T. Housenbold, who we met with a few months ago, but who obviously now can’t comment because of “quiet period” strikes as unusually competent, and as a guy you’d want in charge. It’s just that there’s are literally a lot of bubbles floating around in this area (see page 3 of Shutterfly’s prospectus; there was an extraordinary amount of graphics on this IPO filing, including colorful bubbles), and we’ll say it again: Buyer beware!

Shutterfly raised about $90 million in venture capital from folks like Jim Clark (who now owns 40 percent of the company), Mohr Davidow Ventures (23 percent), and Sutter Hill Ventures (9 percent).

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