An analysis of TheStreet.com by the Motley Fool....
fool.com
<DAILY TROUBLE>
Friday, July 9, 1999
TheStreet.com
(Nasdaq: TSCM)
Phone: 212-271-4004
Website: www.thestreet.com
Price (7/8/99): $33 7/8
HOW DID IT FIND TROUBLE?
So you love the Internet? Me too. You love red-hot stock news right off the skittle? Me three. You even love the over-caffeinated, logorrheic, omnipresent, ever-insightful James Cramer? Me four.
But, $1.6 billion for a financial news and commentary website generating less than $6 million in annual revenues and triple that in losses? WRONG!
In less than three years, TheStreet.com has helped redefine financial journalism for an online audience of traders and other market junkies looking for savvy, irreverent, investment-oriented news.
Its rise to prominence owes a lot to Cramer, who was slyly cast as both a folk hero and an (erotic?) addiction in last year's slick ad campaign on CNBC. A hedge fund manager slash commentator slash journalist, Cramer's sometimes hourly observations on TheStreet's website draw readers back frequently during the day for his experienced trader's perspective on the action.
In case anyone doubted TheStreet's credentials, Media Metrix (Nasdaq: MMXI) figures showed the site edged out the Wall Street Journal in number of unique visitors (942,000 vs. 928,000) for March. Moreover, the New York Times Co. (NYSE: NYT) signed on as a strategic partner in February, pumping in $15 million.
All this, plus the support of first-tier investment bankers like Goldman Sachs (NYSE: GS) and Hambrecht & Quist (NYSE: HQ), made TheStreet's initial public offering on May 11 a predictable homerun, even in a choppy market for Internet stocks.
But was the stock a keeper? Erik Gustafson, portfolio manager at Stein Roe mutual-fund group, told the Journal the day before the offering that he thought TheStreet would "come out smoking," but he expected his fund would "only own it for a day."
Goldman bumped the offering price from the original range of $11 to $13 to $19. The stock opened around $61 per share and quickly topped out at $73. It closed the day at $60, and has rolled downhill since.
BUSINESS DESCRIPTION
Based in New York City, with bureaus in San Francisco and London, TheStreet.com was co-founded in 1996 by Cramer and Martin Peretz, publisher of The New Republic. The show is now run by Chairman/CEO Kevin English, former head of the Nexis Enterprise Group, and editor-in-chief Dave Kansas, a former Journal reporter.
TheStreet publishes around 40 articles a day, produced by its staff of more than 50 journalists, including well-known figures such as Herb Greenberg, and two dozen outside contributors.
The website offers some basic information for relative novices, but it really appeals to more sophisticated investors who like to follow stocks closely. A substantial number of subscribers (25% as of last October) are part of the financial industry.
Revenues come mainly from advertising, which grew to $2.5 million last year (55% of sales) from just $0.1 million in FY97. Although 61 firms advertised on the site in 1998, one firm (apparently Datek) accounted for 40% of ad revenues while the top five advertisers accounted for 67% of ad sales.
TheStreet offers some free market commentary and investment tools to attract readers, but you have to pay for much of the best stuff ($9.95 per month or $99.95 for a year). The subscriber base soared from 6,700 at the end of 1997 to 32,000 by the end of 1998, thanks to over $9 million invested in sales and marketing, including the CNBC ad campaign. Sales to brokerage houses added 2,400 to this 1998 total. Another 5,500 annual subscriptions came from a marketing program that allows individuals to redeem frequent flyer miles for a subscription. By March 31, 1999, the subscriber count had grown to 51,000.
Recent cash infusions have come in the form of strategic alliances. The deal with the New York Times, for instance, includes plans to create a "jointly owned newsroom to provide continuous coverage of business news," according to TheStreet's public filings.
Also, Rupert Murdoch's News America picked up $7.5 million worth of stock in the IPO. That was the prelude to a deal with News Corp.'s (NYSE: NWS) Fox News Network to co-produce a weekly TheStreet.com financial news show available to 40 million television viewers.
Insiders own roughly 38.4% of the stock, including Cramer's 14.4% stake. Outside investors include Oak Investment Partners (6.9%), Chase Venture Capital (6.2%), Japan's Softbank (6.2%), and the New York Times (6.5%).
FINANCIAL FACTS
Income Statement*
12-month sales: $5.7 million
12-month income: ($19.9 million)
12-month EPS: ($1.55)
Profit Margin: N/A
Market Cap: $794.4 million
(*Pro forma to account for conversion of preferred and related dividends into common. Includes $1.2 million in nonrecurring non-cash charges for Q1 FY99. Loss per share not adjusted to account for anti-dilutive affect of shares issued in the IPO.)
Balance Sheet*
Cash: $22.4 million
Current Assets: $24.5 million
Current Liabilities: $3.8 million
Long-Term Debt: None
(*As of March 31. Does not include $94.8 million in proceeds from the IPO before exercise of the overallotment.)
Ratios
Price-to-earnings: N/A
Price-to-sales: 139.4
HOW COULD YOU HAVE SEEN IT COMING?
Traders make an Internet IPO fly, but traders were burned on the scorching MarketWatch.com (Nasdaq: MKTW) IPO in January. That stock topped out at $130 and a market cap around $1.6 billion, but quickly retreated to around $60 by early May -- despite the fact that Marketwatch did $7 million in FY98 revenue (53% better than TheStreet), carries the CBS brand, and enjoys nightly promos from Dan Rather.
In the slippery world of comparative Internet valuations, the market action suggested TheStreet would slide to the mid $30s -- or lower.
Shortly after the IPO, the Times offered another valuation comparison to the electronic publishing part of Dow Jones (NYSE: DJ), publishers of the Wall Street Journal.
Electronic Publishing TSCM DJ
Internet subscribers 38,000 283,000
Q1 revenue $1.99 m $97.54 m
Q1 operating income ($7.35 m) $21.28 m
Q1 operating margin (369%) 22%
Overall
Stock Price $46 $53.63
Market Cap $1.08 b $4.84 b
Market Cap/
Web subcriber $28,389 $17,087
As the Times writer quipped, "Taken just as an Internet play, the whole of Dow Jones is more attractively priced -- and you get The Wall Street Journal for free."
WHERE TO FROM HERE?
Despite "buy" ratings from the underwriters and SG Cowen on June 7, the TheStreet shares quickly slid below $25 amidst the recent interest rate jitters. At that price, it sported an enterprise value (market cap, plus nonexistent debt, minus cash) of around $460 million. Even granting TheStreet's success and well-to-do customer demographics, that's pricey for an online magazine not expected to turn profitable until 2002.
To meet its goal of becoming the leading and most comprehensive source of financial news and information for investors, TheStreet needs to open more international bureaus and spend on new initiatives -- like the television show, which will launch Saturday, July 17.
Still, future promotions will probably look a lot like the recent pact with online broker DLJDirect (NYSE: DIR), giving its customers free or discounted one-year subscriptions to TheStreet. While some magazines take 10 years or more to turn profitable, TheStreet isn't burdened with printing and distribution costs, so there's potentially attractive leverage in the company's business model.
Overall revenue growth has been strong lately, with Q1 results rising 117% year-over-year and 35% sequentially. That followed a 32% sequential gain in the December period after a sequentially flat Q3 FY98.
What's most encouraging, though, is that investors who read TheStreet love it. During the fourth quarter of FY98, 90% of annual subscribers renewed, while 97% of monthly subscribers did so. Studies cited in the company's filings indicate that readers spent 24 minutes per visit on the website last year, and 77% of subscribers visited the site daily.
I believe it. In addition to Cramer's fusillade of daily notes, I especially like Greenberg's daily column, Suzanne Kapner's excellent reporting on retailers, and James Padinha's playfully cranky epistles on the economy. I've even started reading TheStreet before I read the Journal.
My changing habits reflect the sea change taking place in the way investors receive and use financial information. With more than 8.5 million online brokerage accounts today and perhaps 24 million by 2002, more investors are going online to research and trade stocks. That democratization of investing has raised CNBC's profile while allowing TheStreet, the Fool, and other online financial resources to flourish.
While Dow Jones, Bloomberg, and other financial media companies have gotten better at addressing this growing market, TheStreet has been focused on it from the start, cultivating writers who speak in a less formal, Web-oriented voice while serving up solid reporting and insightful commentary. That sounds relatively insubstantial as a competitive advantage, but I think it amounts to one because it suggests a corporate culture that's in sync with customers.
Questions remain. Among them, how many investors are really willing to pay $100 per year for a subscription to TheStreet? And are there ways the company can go beyond striking advertising or marketing pacts with online brokers and generate actual e-commerce revenues?
TheStreet's got a great brand and an appealing product. I'm a bull on the company. The stock is a more complicated matter.
-- Louis Corrigan (TMFSeymor@aol.com) |
