Shares of online content giant CNET (NASDAQ:CNET) were hit hard yesterday. The stock shed nearly 20% of its value after the company warned that it would not be growing as quickly as it had originally hoped in 2006. Major rollouts in the computing and video game industries have been delayed, which is likely to put a crimp in the company's advertising revenues this year.
I could flip down my "doom and gloom" shades and join the exodus, but I just don't see it that way. There's still plenty to like about CNET. Let me count the ways.
1. CNET is still the early bird of great acquisitions
True to its geeky roots, CNET has a way of spotting online trends early. It was gobbling up growing sites before established media giants went hog-wild in the sector last year.
In the summer of 2004, the company forked over $70 million for Webshots.com. At the time, popular photo-sharing sites were mostly the handiwork of hardware companies with digital photo-finishing interests. CNET may not have scooped up MySpace.com -- News Corp. (NYSE:NWS) got that gem -- but it realized that Webshots provided both viral eye candy and a high-volume, user-friendly digital photography site.
Last April, I asked CNET CEO Shelby Bonnie about his company's acquisition strategy. "We just keep our head down and keep building our properties and hope that it's a long time before everyone else figures it out," he replied. Just the response you'd expect from a forward-thinking corporate chieftain who was busy collecting puzzle pieces before the rest of the market realized that there was a puzzle worth piecing together.
2. There's a method to the methodical
Larger companies pay up for perfect dot-com properties. CNET has a knack for picking up fixer-uppers on the cheap, then dolling them up accordingly. The company wasn't doing much with its choice TV.com domain beyond using it as a landing page for television reviews. Then it acquired the content- and community-rich TVTome.com, renovated it, and launched it as TV.com.
It did the same thing two years ago, when it acquired the distressed MP3.com domain. CNET was able to create a portal for premium music downloads there, while opening up a subdomain at Download.com to feature the unsigned artists that made MP3.com their digital music hub.
CNET is doing likewise now for food and cooking enthusiasts, taking the ugly-yet-popular Chowhound.com community site, the editorial staff of the now-defunct Chow Magazine, and the Chow.com domain to create a new Chow.com site this summer.
3. Ads and addition
This past quarter, Google (NASDAQ:GOOG) accounted for just 10% of the company's interactive revenue. CNET still prefers to sell most of its ad space in-house, and it's been pretty good at that. All but four of its 100 largest advertisers in the fourth quarter of 2005 came back this year.
However, a tour through CNET's many properties will quickly show you where the ad targeting could be better. A little more Google, placed appropriately, could go a long way.
4. Untapped real estate potential
CNET is blessed with choice domains, and the ones that have been developed are largely successful in attracting Web surfers. But there's much more that could be done with less-visited sites such as Search.com, given the lofty search engine valuations at Yahoo! (NASDAQ:YHOO) and Google. There's also room for editorial enhancements at some of CNET's newer properties, like TV.com, BNET, and MP3.com.
This isn't a pure domain-monetization play, like Marchex (NASDAQ:MCHX). CNET has already built up some amazing properties in its portfolio, and anyone valuing CNET based solely on a near-term slowdown is missing the bigger picture.
5. It's putting on a game face
As the owner of the Gamespot videogaming site, CNET was again ahead of the curve. Recent purchases of IGN by News Corp. and Xfire by Viacom (NYSE:VIA) only reinforce CNET's ability to arrive fashionably early. I asked Shelby this week whether all of this attention may lead to the company selling Gamespot, should the right offer come around, but he insists on holding onto it.
"We love Gamespot.com," he said, and it's easy to see why. Gaming enthusiasts are a loyal lot, and advertisers realize that the best way to reach that key group is no longer through televised spots. Instead, they need to go through sites like Gamespot.
6. CNET shares are cheaper today
That 19% haircut yesterday certainly makes CNET even more attractive. If you believe the company's reasons for its slower growth rate in 2006 -- that the delays of Microsoft's (NASDAQ:MSFT) Windows Vista and the PlayStation 3 have advertisers holding back in those key endemic areas for CNET -- then it's all the more reason to believe in an explosive 2007 showing.
You can do what CNET usually does: Buy in early. You can snap up shares at prices last seen this past summer. Vindication may take some time, but given CNET's position as the landlord of prime online real estate like News.com, Search.com, and Download.com, you could do far worse than becoming a shareholding tenant.
CNET shares were recommended last summer to Rule Breakers newsletter service subscribers. Microsoft has been singled out to Inside Value readers.
Longtime Fool contributor Rick Munarriz is a fan of CNET, but he does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
