Is TheStreet.com Cheap Enough Yet?

While clearly not everyone appreciates the daily musings of Jim Cramer, it is hard to argue with his success as a media personality. One of his early vehicles, TheStreet.com (TSCM) has fallen into the abyss due to concerns about declining online advertising spend, mundane traffic growth, customer concentration and questionable product strategy. The stock currently trades at $3.62, down from $15.39 at the beginning of the year.

At this point, the company has a market capitalization of $113.7 million. Looking at the balance sheet, we can see that the company has $80.4 million in cash, $55 million of convertible preferred stock and no debt, implying an enterprise value of just $88.3 million. This is a company that generated $74.6 million in revenue and $15.9 million in EBITDA over the past 12 months while posting both top and bottom line growth (though margins did decrease).

This suggests a deep-value situation that requires further analysis. Thus, TSCM will become Part 2 of my treatise on deeply discounted tech stocks. For Part 1 on SiRF (SIRF), please click here.

Why is it so cheap?

Well, Q2 was actually pretty good. The company generated $19.7 million of revenue, beating consensus estimates by $0.4 million. EPS of $0.07 was in line with the Street. The company also reported a record number of visitors to the site. Marketing services revenue was up 71%, advertising revenue was up 16%, paid services revenue was up 9%, while subscription revenue was down 5%.

Clearly, the world has changed since then. The economy has significantly deteriorated, particularly among the financials who make up a large portion of TSCM’s advertising base. This has exacerbated the difficulties associated with transitioning the revenue model from subscription to advertising.

So it was not surprising that Q3 showed significant problems. The company generated $16.7 million of revenue, representing a 4% increase over Q3 2007 and a decrease of 15% from Q2 2008. This was driven primarily from weakness at Promotions.com – a recent acquisition where revenues decreased by $2.9 million due to poor pipeline conversion and campaign cancellations. Unfortunately, the company was not able to manage costs to compensate for the top line shortfall. Sales & marketing expenses increased by $900,000, D&A increased by $800,000 and investment income declined by $200,000, causing the company to swing to a loss of $1.1 million for the quarter, from a profit of $3.8 million in Q3 2007. On the brighter side, the company averaged 8 million unique visitors for Q3, a 27% annual increase and a record.

What does the future hold?

In the short-term, CFO Eric Ashman sums it up best when he says, “it is safe to say that we have very little visibility into online ad spend for the rest of the year or for 2009.”

The online advertising market faces significant and increasing headwinds, somewhat mitigated by the superior analytic and reporting capabilities of the medium vs. offline advertising. However, longer-term I don’t think you will find anyone who disagrees that the online advertising market represents one of the largest secular growth trends around.

Additionally, TheStreet.com is poised to benefit from what I will call “the consumerization of the capital markets.” Sites like Seeking Alpha, TheStreet.com and The Motley Fool all illustrate the powerful ability of the Internet to democratize financial content creation and distribution channels. As more and more people become disenchanted with established Street franchises (which have been incredibly capital destructive), they will turn to the proven winners who will emerge from the sea of contributors in the online financial media world.

This is not to say that TSCM will be the winner this regard. For example, if its professional newsletter authors or amateur contributors are unable to provide relevant advice, there are a number of other avenues for consumers (and advertisers) to go.

Stepping back, it is also worth noting that the company has been able to sustainably grow revenues from $25.3 million in 2003 to $65.4 million in 2007, a 26.8% CAGR, and EBITDA from $0.7 to $15.4 million over the same period.

Valuation

As I mentioned previously, TSCM has a market capitalization of $113.7 million and an enterprise value of $88.3 million. Consensus estimates for 2008 are $73.8 million in revenue and $12.1 million in EBITDA. This implies that TSCM trades at just 1.2x 2008 revenue and 7.3x 2008 EBITDA. In my opinion, Q4 projections look optimistic so I would be surprised if they hit those numbers.

TSCM’s subscription business is significantly undervalued. Let’s do a quick analysis: at the end of Q2 2008, the company had 80,400 subscribers, down from 86,200 in Q2 2007, a decrease of 6.7%. Excluding changes to revenue recognition policies, quarterly revenue per subscriber hovered around $94. By my analysis, assuming a WACC of 15%, annual decrease in subscribers of 6.7%, constant ARPU, and a FCF margin of 30%, the subscription business is worth $66.4 million, or 75% of the enterprise value.

Still, I don’t believe in the company’s organic and inorganic growth strategy (though acquisitions have been put on hold until 2009). De-emphasizing subscriptions is an unfortunate consequence of the competitive landscape and early forays into lead generation are promising, but MainStreet.com and Promotions.com cannot be considered anything but failures at this point. I am comforted by the presence of Technology Crossover Ventures as an active, preferred investor, but don’t believe the firm can add significant short-term value (though long-term, it is hard to argue with the track record of a firm that has invested in leading Internet companies such as C|Net, eHarmony, Expedia (EXPE), Fandango, Netflix (NFLX), NexTag, Orbitz (OWW) and TechTarget (TTGT).

Moreover, in the short-term, the core online advertising business will continue to weaken, probably significantly. Because the subscription business is fairly easy to predict, most of the earnings volatility will come from advertising. This will make for a rocky ride over the next few quarters. Thus, the stock is cheap, but there will likely be better opportunities in the low $3’s that will cause me to become a buyer.

Disclosure: None.

Comments

[Alex Filonov:]

There are other problems.

1. Technical. Latest site redesign was awful. Now it's easier to find articles through Yahoo! Finance or Google search than on site itself. And sister sites are not designed any better.

2. Too many sister sites. Looks like somebody's trying to build media empire. May be TSCM should stick to what it's doing better?

Disclosure: long TCSM.

2008 Nov 06 05:24 PM

[Hedged In:]

Excellent article.

2008 Nov 06 05:32 PM

[ksh777:]

Pardon me, I am a novice.
When the author says "An enterprise value of 88 million",
does that mean book value, or liquidation value?

Also what do abbreviations WACC, CAGR mean?

2008 Nov 12 12:30 AM

[Kenneth J. ...:]

First, for ksh777, I was in Las Vegas at the Money Show a few years ago when the top person at Yahoo Finance asked the biggest audience of the entire event if they knew what "enterprise value" was and nobody knew. Don't feel bad either, as I'm stumped by those acronyms you're asking about too! I believe he was bragging at the time that Yahoo Finance was the ONLY investment site providing that data, while arguing that the total value of its stock's market cap plus its the company's debt (bonds etc) was actually an important figure they were calling "enterprise value".

Now let's talk about TSCM...

I finally heard from thestreet.com's Rebecca Updegraph yesterday evening concerning inquiries I started making last week. For years, TheStreet's proprietary index was part of the daily analysis among other indices including the Gold & Silver ($XAU), Bank ($BKX), Broker/Dealer ($XBD), Networking ($NWX), Semiconductor ($SOX), Integrated Oil ($XOI), Biotech ($BTK), Healthcare ($HMO), Retail ($RLX), Oil Services ($OSX). It seems somewhat ironic that they would cease calculation of an index that had allowed investors to guage the performance of the very industry which that Internet - Content company resides. They must have had some good reasons for that decision.

Updegraph said the index "wasn't being utilized" and she will get back to me with more information soon. Not being utilized, huh? There was suddenly a hole in my routine reports, and when I look at sites like Yahoo Finance to see the indices' data they provide, guess what? I still see the ^DOT finance.yahoo.com/indi...

Few headlines ever come up on any of the indexes, NONE ON THIS INDEX, IN FACT (finance.yahoo.com/q?s=... ) SO INVESTORS ARE LOST IF/WHEN they go looking! I feel in my heart we have a fiduciary responsibility to help the lost investors!

I literally had to spend a fair amount of time to get this "story" while nobody else on the planet (other than an easy-to-miss announcement from Nasdaq OMX) bothered to even issue a press release on it.

CANSLIM.net, in keeping with its objective of providing superior fundamental and technical reports concerning stocks, industry groups, and the major averages most relevant for investors, has begun tracking the AMEX INTERACTIVE WEEK INTERNET Index ($IIX OR ^IIX) which is comprised of 40 stocks. This index will be analyzed in place of the recently abandoned TheStreet.com Internet Sector Index ($DOT) which contained 23-stocks.

The "Industry Group Watch" section of the CANSLIM.net After Market Update provides daily analysis on the performance of leading and lagging industry groups. It is part of a membership which includes ongoing reports designed to keep investors informed. We think that this change makes the most sense under the circumstances. I do not believe it was a component of its own proprietary index, at least not recently, but we are nonetheless intrigued as to why the folks at TheStreet.com (NASDAQ: TSCM) decided that 2009 was the year that it would quit supporting their proprietary index which began on September 30, 1998.

Further on this point, the decision to abandon their proprietary index reveals several reasons for any current TSCM shareholder to be concerned. The action may be revealing that the company's directors are under-estimating its assets, neglecting them, failing to extract sufficient value form them, and/or having trouble exploiting any apparent advantages the company may still have.

Jan 06 02:31 PM