One of my favorite digital media and tech companies, CNET, has had a bit of a rough ride of late. The picture says it all, but seeing how I’m never short for words, “says it all” is not in my dictionary.
I bought CNET stock in when it was about $9 ages ago (”ages ago” refers to about 2 years ago, a lifetime in Web life cycles, I presume). I stuck with the stock as it slid below $7 (I rarely sell if I like the company, thinking that over time, stock prices tend to come back and surge over your buying price if you buy good companies. This does not always happen, but in that case, it at least helps your balls turn to steel, if truth be told). I also thought that independent of the company’s fundamentals, it was one of the few remaining large acquisition targets for old and new media in the digital space, so not only was it a good stock to own, it was also, admittedly, a speculative play.
Which, independent of the recent stock options problem facing the company explains investor’s love and hate relationship with the stock: do they buy it cause they believe in it long term? or… do they buy it cause someone else might pay more for it tomorrow? You know, the greater fool theory.
Anyway, as much as I liked the company’s portfolio and bench, I got out when its market cap began to flirt with $2 billion and it became clear that CNET CEO Mr. Shelby Bonnie would not sell to anyone, or, should I say, no one would pay $2 billion for his company.
You see, I admire and respect Mr. Bonnie for the simple reason that he bought up a lot of valuable real estate online in the early days and sat on it: CNET owns url’s like search.com, TV.com and the like. Of course, CNET’s bread and butter is the namesake website and news.com, along with many other properties like Gamespot.com. I am not a gamer, but from what I hear from them, Gamespot.com is as good of a website if not better than major competitor IGN.com. Disclaimer: I was an employee of IGN.com for six months after they bought a site I worked at. I was there when News Corp. bought them, both News Corp. and IGN are fine companies, though I’d appreciate it if they left me the hell alone. All to say, when it comes to competition, CNET’s got plenty.
But, while I personally respect the man for toughing it out as a stand alone player, you know the saying: buying/investing is only half of the equation, you gotta know when to hit the cash register and sell the stock, or seek an exit strategy in the case of a founder/investor.
That’s why, you could say - as as investor - I am in fact critical of CNET’s strategy. As a student of business, I appreciate their desire to stick it out alone. Problem is that CNET counts as its competitors News Corp. (since they bought IGN), Yahoo! (both compete in search and online ads), and frankly, every major player out there. But despite its great portfolio and rich history as an online player, it lacks scale. Odd thing is that if purchased by the right company, it can give it a lot of scale and reach, but compared to the biggies online, it is a small player. I know, ironic.
It can grow, for sure, but it will always at this rate be chasing Yahoo, AOL, Google, IACI, MSN. And as News Corp.’s Fox Interactive Media bolsters its suite of sites with IGN and MySpace, well, CNET finds itself increasingly on the outside looking in. CNET has search, something that FIM lacks. I also like what CNET is doing with online video.
After News Corp. bought both MySpace and IGN, there were rumors of Viacom buying CNET, but I am not surprised Mr. Bonnie does not want to sell to them. Those seem like two very different companies in terms of culture. Then again, I am not sure Viacom wants to pay what CNET is asking for.
CNET is now worth $1.2 billion, a “far cry” from the $2 billion it was asking last year. All right, so it was never asking for $2 billion, it’s what some figured it would take to buy them out.
Which begs the question: is CNET a buy at this price?
Right now, indeed a large cloud over the company is the option backdating issue, though they are not alone. Apple, Rambus, Applied Micro Circuits also are in the news for the same reason.
When it comes to unsystematic factors: one must ask whether a company that was worth nearly $2 billion just a few quarters ago is worth more or less today when you consider that online ads are only growing…
But there might be your answer: old media companies that looked like suitors might no longer be looking for the hail marry solution (such as buying a CNET) and will probably henceforth look to develop their own digital strategies. Disney is one example.
So, as an investor, you have to ask yourself: do you like CNET enough as a stand alone player to buy in? If you answer yes, then go ahead. Cause at $1.2 billion, it should be worth more in 3, 5 or 10 years. But do so knowing that it might remain independent and always be on the outside looking in, and potentially lose value relative to the bigger players.
Then, and only then, think that as bonus or a safety net, if ever the company’s do-it-alone does not prove to be successful, it could be bought by a larger old or new media player.
Disclaimer: I own shares of CNET, but that doesn’t mean you should too.
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