CNET's Traffic Collapse and TheStreet.com

Mid-last year, I shorted CNET (CNET) in quantity at about $11. CNET, focused on technology reviews and news, was facing a seismic shift in its competitive environment, and nobody seemed to notice.

Yahoo was about to launch its own technology content. AOL beefed up its technology content by purchasing Weblogs Inc., a blog network dominated by gadget review site Engadget. And more important than both of those: there was an explosion of technology blogs, many of which were more focused, more informed, and more interesting than CNET's tech coverage.

Meanwhile, CEO Shelby Bonnie put CNET up for sale. But there were strong reasons why it wouldn't sell, including the fact that it was just too expensive. Despite that, speculation that Yahoo would buy CNET resurfaced in January.

Did Mr Bonnie understand the threats that CNET faced? My guess is he did. As far back as August 2005, evidence emerged that CNET was losing traffic. CNET had tried to boost growth by acquiring online photo site Webshots. But Webshots lost share to Facebook and other photo sites. Mr Bonnie evaded analysts' questions in the June 2006 conference call.

And now it's all played out. In a stunning development at the same time as Mr Bonnie's departure due to options-related issues, it's finally become clear that CNET is bleeding traffic. In Eric Savitz' words:

...clearly, there are more troubles at CNET than simply options backdating: it seems to be losing its audience. Youssef Squali, the Internet analyst at Jefferies & Co., says ComScore data suggests that traffic has been crumbling at some of the company’s core sites, with an overall 50% year-over-year drop in page views for all CNET properties in the third quarter. (Squali says his own estimates were for a 5% decline.)

Squali says that according to ComScore, page views fell 54% versus last year at CNET.com, 21% at Gamespot and 30% at ZDNet. Page views at Webshots, the company’s photo sharing site, dropped 69%, as it suffered in the face of competition from more popular social networking sites.

So did I make money shorting CNET last year at $11? Well, the stock is now at about $9 -- that's almost a 20% gain on a short position in a rising market. But no, I covered my short at about $15 at the very peak of CNET's stock price at the end of 2005, at the height of the acquisition speculation frenzy.

Why? Because I thought I'd realize my capital loss to offset gains, because I got rattled by the barrage of positive CNET press, and because I let short term trading considerations override a sound investment thesis. As a result, I ignored all the evidence and sound analysis that had led me to short the stock in the first place.

What a mistake.

I'm not going to repeat this mistake with TheStreet.com (TSCM), which I'm still short. Readers of Seeking Alpha certainly recognize the proliferation of stock market blogs with outstanding content. Look also at the fact that TSCM's boost from Jim Cramer can't lead to sustainable growth, how the company failed to sell itself, and how the stock is expensive. (Here's my short thesis in full). Yup, there's lots of Cramer and video-induced buzz. But this time I won't be rattled.

Hopefully my TSCM short will work out better than my CNET short did...

Full disclosure: short TSCM at the time of writing.

Comments

[Aaron Brask:]

I agree with your view of the macro picture for this stock (competition and minimal barrier to entry) but I think you left out a couple of details:
- Accounts receivable is now about 30% of their earnings and has risen over last few years. Not condemning but not pretty.
- CEO dumped about 37,000 shares earlier this year around $12 (from exercised options) ... sorry, without a position to motivate me, I am too lazy to dig through to see how much he had in total
- Return on equity/assets is VERY low

But it also has no debt and it is never a good idea to underestimate the potential of bankers to find people to inject new funds to finance unwarranted expansion... Indeed, looking at earnings and FCF growth, investors could easily get sucked in.

Just my 2 cents...I think LTM is better short.

2006 Oct 12 02:02 PM

[David Jackson:]

Interesting... What's the short thesis on LTM?

2006 Oct 13 07:48 AM

[Aaron Brask:]

There was an article somewhere on here I came across when looking for more information. It was written by the 10Q Detective. [related digression: it is funny how most analysts are happy not to delve into 10Qs]

To me (and I am NOT an equity analyst so take w grain of salt) LTM is simply a case of Wall Street's attraction to a company with growing earnings no matter how/where the earnings came about/from. It loos like this earnings growth was through expansion by in an unprofitable manner. I would think that if a gym (or chain of them) was succesful, it would generate good free cash flow. And I thought if you bought a (good) gym, it would have been making money. But the have managed to burn cash EVERY quarter for a few years now. But earnings are growing? And now their cash situation does not look healthy at all.

2006 Oct 13 08:59 AM

[Jack Marks:]

TSCM and Ossama Bin Laden have alot in common. They are hard to kill. While TSCM's management is mediocre, they have sloughed ahead like Forest Gump, and built a nice direct marketing business, selling subscriptions to tout sheets. It's a great business.

The value of free research is its selling price. There will always be investors who will pay for stock tips - as long as a clever marketer is doing his job. TSCM has been smart enough to hire good copywriters, and marketers to ensure a nice recurring revenue base from dozens of newsletters. If Cramer were hit by a bus, TSCM's business would continue straight ahead.

Sorry to burst your bubble, free blogs will not kill TSCM. The stock is in a bullish trend, and the trend is your friend.

The reason no PE shop, or strategic buyer wanted to buy TSCM is that its valuation was way too high as a mature DM business. Now it's even higher. What TSCM should have done, and still be doing is buying up subscription newsletters. They could have bought Phillps business, or Agora, or any of the other tout sheet vendors. TSCM's management does not have the balls to take any risks.

2006 Oct 13 05:49 PM

[David Jackson:]

I actually agree with many of the points you make, Jack. Becuase most of TSCM's business is subscription newsletters, and the accounting for them mandates that revenue is recognised gradually as the subscription progresses, TSCM's business over the next few quarters won't be impacted by short term factors. But a stagnation in traffic growth will decrease the number of new subscribers for paid products, so there is longer term risk. And the Street is pretty good at pricing-in long term earnings to a stock's price.

2006 Oct 14 01:08 PM