I've observed a lot of exciting things in the Internet world since the mid-1990s. I've seen the Netscape IPO, the emergence of cool companies like eBay (NASDAQ:EBAY), and even the silliness from the likes of Pets.com and Webvan. I'm also a big fan of CNET's (NASDAQ:CNET) News.com, and I visit the site multiple times a day. But none of this is necessarily a reason to buy CNET's stock. Unfortunately, CNET is a classic example of a bloated company.
OK, I agree with Rick's contention that CNET is a valuable asset. With Google (NASDAQ:GOOG) investing billions to lock up traffic-rich sites such as AOL.com and MySpace, online real estate is certainly high-rent. After all, traditional forms of advertising, such as radio, magazines, and television, are not as accountable and targeted as the Internet is.
To get more action, CNET has diversified into other categories, such as with TV.com, ChowHound.com, and UrbanBaby.com. On the face of it, this is a smart strategy. The company has shown an ability to grow emerging dot-com properties. However, CNET is beginning to veer from its core. Let's see . its sprawling sites cover high-tech, business news, games, auto reviews (in China), food, and babies.
Rick admits that CNET's Webshots saw a yearly decline in traffic as it faces intense competition from Facebook, MySpace, Flickr, and a flood of Web 2.0 me-toos. Moreover, Yahoo! (NASDAQ:YHOO) recently launched a tech property that is competitive with CNET's. Perhaps Google may do the same?
Bloat and buyout bait
Rick argues that CNET is actually buyout bait. Given some of the nosebleed valuations in the tech space, this is definitely a valid point. But there is another element to the story: A potential buyer would get a lot of traction by cutting away the significant cost structure.
Keep in mind that CNET has 2,340 employees. There must be some fat in there, right? Well, looking at the first-quarter results, we see that CNET's margins are weak. Cost of revenues accounted for 50% of revenues, sales and marketing were 28%, and general and administrative costs were 17%.
In comparison, Bankrate (NASDAQ:RATE) has a better model. In the second quarter, EBITDA was 36% of sales. Besides posting strong sales, Bankrate has been vigilant on controlling costs. The headcount is only 163 employees.
According to the company's CEO, Tom Evans, on the most recent conference call: "As I have mentioned on numerous occasions to you, we are very EBITDA-focused and remain so."
Why can't CNET do the same?
Some bad options
Next, there is the matter of the option backdating at CNET. There is an ongoing SEC inquiry, as well as a grand jury subpoena. Of course, CNET is not alone; unfortunately, during the dot-com craze, there was an options free-for-all.
The investigations are unprecedented, and as a result, it is impossible to determine the outcome. But some things are certain -- investigations are expensive and a distraction for management. Even if no fraud is found, the fact remains that the practice indicates managerial sloppiness and a complete disregard for the impact of dilution on shareholders. In fact, Rick wrote a great piece on the topic recently.
There's something else: Because of the options mess, CNET was unable to report its net income figures for the second quarter. How can any Foolish investor buy a company without this critical information?
In conclusion .
CNET is a wonderful company, and it's in a red-hot space. With its stable of high-quality properties and enormous monthly visitors, it would be tough not to grow the top line. But looking at its financials, we see the company lacks old-fashioned discipline. Instead, management is spending money like it was 1999 -- and that is certainly not shareholder-friendly.
As for a buyout, this is pure speculation. Maybe CNET wants to remain independent. Why sell out when there is still lots of excitement in the business? Besides, the options investigation is likely to have a dampening impact on a buyout valuation.
Simply put, there are a variety of other Internet-content players that are leaner, such as The Knot (NASDAQ:KNOT) -- yes, another Rule Breakers pick -- and Bankrate. As for CNET, given its top-heavy cost structure, it looks more like a traditional media company, not an Internet company.
Think you're done with the Duel? You're not! Go back and read the other three arguments, and then vote for a winner.
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Fool contributor Tom Taulli does not owns shares of companies mentioned in this article. The Motley Fool has a full disclosure policy.
