Why Is TheStreet.com Trading for Less than Cash?

TheStreet.com (TSCM) announced layoffs after announcing that their long time CEO Thomas Clarke was leaving the company.

TCSM is one of the 20 or so companies we have had M&A talks with over the years. Our brief discussions with TheStreet.com date back to May 2007. I never met with Mr. Clarke, but rather, some of his lieutenants.

Trading for Less Than Cash

Today, TheStreet.com sports a market cap of $62M, but, they have $72M in cash! For all intents and purposes, the company broke even in full year 2008, though they seemed to have dipped into the red in Q4 2008, with about $2M in losses.

But would that explain trading for less than cash?

Debt, you ask? Nope, no debt.

So, what gives?

The F Word: Finance

You’d almost think that they were being traded as a financial company instead of what they are: a media company focused on the financial industry. To quote Chris Rock: is that a crime?

Anyway, when I met them, I did not initially see obvious fits (even though I emailed them first, it was to ask why they did not buy Wallstrip, who sold to CBS (CBS) instead), but once we chatted about passing on WallStrip (which CBS bought for $4M but has since ceased producing), I thought that TheStreet.com could acquire us to:

• diversify into lifestyle content, and
• bolster their video capabilities.

Personally, I was interested in moving some of the operations of our company to NYC, but the diversification away from both finance and text was wise. And… having Jim Cramer as your boss? Priceless…

Cramer and TheStreet.com are obviously not newbies when it comes to video content but to put their advertising business on turbo, it wasn’t enough, neither in scope nor in breadth (to be clear: this is not a knock against the videos they produce, but a comment on their need for more content and to focus on other topics).

Golden Rule of Finance: Diversify

The diversification card was wise, and in hindsight, a missed opportunity for TheStreet.com. I’d done / seen it once: my old company AskMen was a publisher of men’s lifestyle text content, and it got acquired by IGN who was strong in video games but weak in lifestyle. They did a bunch of acquisitions and sold to News Corp. (NWS) for $650M. In a crazy way, I could see TheStreet.com growing rapidly and selling for something in the same ballpark range, if not more, especially with both NBC and News Corp. ramping up financial news.

While we never signed an NDA, out of principle I will leave out some of the more private details out of courtesy, but some general, public points and observations:

- At the time, TheStreet.com was an interesting case study in a company that could go either way. The stock was trading at about $11/share (the hand marks the week I was in their office). Today it’s flirting with $2.

How much of that is systematic and how much is unique? Let’s see.

- They had a decent sized subscription business at a time when everyone was looking to shore up their advertising business.

- Despite fairly strong revenues and a huge cash hoard, they did not benefit from the multiples of advertising based companies during the run-up of the stock market of this decade.

- They had a market cap north of $250M with $50M in cash, for an enterprise value of $200M.

- They then tried to get into advertising and non-subscription revenue streams (they acquired Promotions.com) but they never diversified away from financials quickly enough.

- By 2008, when the financial sector imploded, their exposure to the segment was too high and I guess this is reflected in the stock price now. Admittedly, all of the media companies have seen their market caps get decimated.

If TheStreet.com had more exposure to advertising, it would not have guaranteed success, of course, given their focus on financials and the nature of this slowdown: while financial sites’ traffic rises when markets are both extremely good or bad (or when a scandal like Bernie Madoff hits), it’s hard to convert the traffic in bad times, because

• a) investors trade less and revenue share programs with online brokers dries up, and
• b) financial advertisers themselves were losing money by the truckloads, so they could not advertise.

But what really exacerbates matters, I think, is precisely the reliance on subscriptions and their focus on finance. Since the market took a nosedive, fewer users feel the need to maintain subscriptions because stocks are headed for the toilet and expert analysts look like novices themselves.

Ultimately, talks never progressed to talk about price and integration, but I think this is a classic textbook example of why diversification matters. People always asked me why WatchMojo.com publishes content across automotive, business, health, fashion, travel, entertainment, etc., and I told them it was all about diversification and strength in numbers…

It’s kind of ironic that a media company that focused on finance overlooked the golden rule of investing: to hedge yourself.

Ultimately though, with its balance sheet and income statement, the stock kind of seems attractive, but don’t take this advice and opinion as anything other than entertainment, because the current market continues to have difficulty going anywhere but down.

Comments

[Silverfox2:]

The Street's EBITDA margin in 2008 was 9% compared to 23% in 2007, which may have have something to do with the recent management change and the depressed valuation.

Mar 23 10:02 AM

[Ashkan Karb...:]

Great point Silverfox2... I am going to look into the figures to see if the fall was heaviest in Q4 (when financials meltdown and advertising slowed down) or consistently / slowly throughout 2008.

Mar 23 11:08 AM

[Ashkan Karb...:]

A rather important point to make. I knew something was off, and Bill Martin, of Indie Research / InsiderScore emailed me to let me know:

"Study their venture transaction with TCV.. TCV has a preference on the stock they bought.. so about 55 million of the cash is spoken
for in any transaction."

As such, saying they have no debt is incorrect.

This explains why the stock is priced the way it is.

Mystery solved. Still think they need to diversify away from finance, though.

Mar 23 12:21 PM

[myfakename:]

Perhaps trading for less than cash is also due to the fact that eventually they are going to throw away all of that cash, and layoffs of people that should have been fired well over a year ago are not going to stave that off.

Look at their business units, an editorial department run by a man that is the primary reason most of their best journalists have left the company over the past few years.

A poor purchase of the Bankers Financial Products for $25 million primarily for the BankingMyway property when they could have built a better site for less than $1 million. All of this time and that site still looks like amateur hour and is now being run by who a biz dev guy from online dating?

MainStreet.com which started out as a entertainment site or something and still has not found any direction and is currently being run by a lawyer with no background in building a site up?

Stockpickr which appears to have been abandoned by Altucher.

A subscription business, which I hear from my sources inside is now being run by some Analyst who does not have the first clue what he is doing and does not understand the most basic principles of marketing.

And a company culture of finger pointing, backstabbing and ass covering (of which I hear their chief of operations is the King of).

$50 million or so in the bank means nothing when a company is just waiting to implode.

There is no good story coming out of TheStreet. And for those of us who came in when that $13 property came down into the $8 range and then added to the position? Well we are screwed until the company stops killing itself.

Mar 23 12:41 PM

[Mr. Ed, Jr.:]

I am a former subscriber to The Street.

I grew weary of having to pay more and more for each added content-- after a while, it starts to feel like a hustle.

I was not impressed with the website navigation...finding what I was looking for was somewhat difficult, and I never really understood stockpkr ( Not sure which of us was at fault there, though).

But the thing that made me really feel like I was being hustled and that my time was absolutely not being respected by them was the videos. Prior to every video, they would play a very annoying 30 second commercial for a pill that temporarily cured male impotance (And the dysfunction was named after me-- ED.) It wasted my time , annoyed me and made me watch commercials when I was paying for a subscription.

To me, all of these things demonstrated they did not respect their customers, so I did not renew. I think that is how companies get their stock to $2.

Mar 23 10:50 PM

[Ashkan Karb...:]

Mr. Ed.

Thanks for the feedback.

Mr. MyFakeName,

Thanks for the insight. Priceless.

Mar 24 11:34 AM

[MoonshineDe...:]

There are many reasons why TSCM is at two bucks.. However there's only one that truly matters... the website itself. Bottom line - The Street.com is a BAD web experience. The site ls painfully slow, shamelessly crammed with bloated advertising, and has a very soulless look and feel.

Apr 02 01:45 AM

[User 162579:]

Just wondering how the KING of commenting on everyone else's business can not manage his own.

Apr 03 04:41 PM

[Ashkan Karb...:]

Hey User 162579,

Hmm... our business is actually doing rather well.

WatchMojo has served 50,000,000 streams on a rather light initial seed investment, with actual revenues and clients and not embryonic ideas.

But, why am I arguing with an anonymous poster. Feel free to question any of the strategies or tactics we deploy... or the results etc... in a private or public forum.

I welcome your criticism if it's actually based on our company and not void of merit or substance.

Apr 05 04:13 PM

[ksh777:]

I was sitting here thinking. I know TSCM, with no debt, will be around for a very long time. Right? Eventually, somebody has to wake up at TSCM and do something right. Then the stock will be bid up?
Am I correct?

Apr 07 02:51 AM

[User 162579:]

KING = Cramer... I don't think you are there yet. But nice writing.


On Apr 05 04:13 PM Ashkan Karbasfrooshan wrote:

> Hey User 162579,
>
> Hmm... our business is actually doing rather well.
>
> WatchMojo has served 50,000,000 streams on a rather light initial
> seed investment, with actual revenues and clients and not embryonic
> ideas.
>
> But, why am I arguing with an anonymous poster. Feel free to question
> any of the strategies or tactics we deploy... or the results etc...
> in a private or public forum.
>
> I welcome your criticism if it's actually based on our company and
> not void of merit or substance.

Apr 07 03:19 AM

[Ashkan Karb...:]

Hey User 162579

Well... now I plain embarrassed ;) - thanks

Ash

Apr 07 08:36 AM