Investors Should Stay On Sidelines Despite 28% Drop In WebMD Shares

| About: WebMD Health (WBMD)

Ten years ago, when people wanted to know more about a medical condition, they wouldn't think twice to go online and type in However, the increasing popularity of Wikipedia and search engines has changed the game entirely. Internet based companies that are successful are the market dominant players in their respective fields. For example, Facebook dominates social media, Google (NASDAQ:GOOG) dominates searches and Ebay (NASDAQ:EBAY) dominates online auctions. For medical information, the field has expanded beyond WebMD (NASDAQ:WBMD) to sites including Wikipedia, Mayo Clinic and National Institute of Health.

Over the years, WebMD has attempted to mitigate competition by offering more information including managing through diseases and finding support groups. While this effort will likely draw traffic from people who are serious about managing their disease, it does little to capture the people who are symptom surfing to see if they have a disease as a result of a recurring pain.

The company's most recent announcement does little to reassure investors that a sound strategy is in place to reclaim the company's spot as the place to go for health information on the internet. The press release starts by stating that the CEO of 10 years will be leaving the company. Many investors viewed Mr. Gattinella as a capable executive and the move generally displays a lack of direction at a time when WebMD desperately needs it. The company goes on to provide poor guidance of a 5%-8% decline in revenue in 2012 and attributes competitive pressures and big pharma patent expirations for the decline. Management expects the fall to be more dramatic in the first half, with a second half recovery. Additionally, costs are anticipated to increase as management looks to invest in the future. While it's possible that this strategy works out, relying on a rebound in the second half is always a risky strategy. Finally, the press release stated that after forming a committee and engaging in discussions with potential suitors, it has terminated the process to review a sale of the company.

WebMD is one of the oldest brands on the internet. Large internet brands have experienced varying degrees of success over the past ten years. While Yahoo (YHOO) remains a household name, the company has failed to sustainably grow profits. rose and fell in a short period of time, overtaken by Facebook. Google remains dominant in search. While the three mentioned examples are household names, their business models took them in different directions.

The question for WebMD investors is if they can trust management to navigate through the uncertain and increasingly competitive advertising environment on the internet. With shares trading over 20x 2012 EPS expectations and the Board of Directors taking a sale of the company off the table, we would wait for more clarity on the company's strategy before making an investment in shares of WebMD.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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