One year ago, two Fools locked horns over online-content maven CNET Networks (NASDAQ:CNET). Lots of water has flowed under the bridge since then; let's take a look back and see whether the winner really should have won.
The bull horn
The bull case was presented by Duel-maestro Rick Munarriz himself. After all, he did recommend the stock to Motley Fool Rule Breakers subscribers. Twice!
Rick liked the company's massive library of valuable domain names -- some better-developed than others. The company's growth-by-acquisition strategy looked good; CNET was getting better at squeezing higher profits out of declining page views; and Rick thought that some bigger Internet player might want to buy CNET whole. Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO), and Microsoft (NASDAQ:MSFT) were mentioned as possible suitors.
Then again, it wasn't all about getting primed for a buyout. "No suitor? No problem," Rick said. "If CNET's growth appears lethargic, just wait until the sponsors come back in a few months, when Microsoft's Windows Vista fuels PC upgrades and the PlayStation 3 and Nintendo (OTC BB: NTDOY.PK) Wii get software publishers marketing their titles again. CNET's award-winning tech and gaming content sites are important cogs in the CNET engine, and those catalysts will provide fiscal layups."
The teddy bear
Tom Taulli took the opposing view. While he was a fan of CNET's News.com, he thought the company was a bloated, uncoordinated mess.
A supposedly nimble online publisher has no business employing half as many people as Dow Jones (NYSE:DJ), Tom claimed. Much of that head count fell outside CNET's core competency, reporting on technology news and related issues. The impressive content portfolio deserved better than seeing its profits frittered away on unnecessary expenses, Tom argued, and some good old-fashioned fiscal discipline would have pleased him greatly. Closing the stock-option backdating review would have been a good start.
And the winner was ...
In the end, 65% of our voters took Rick's side in this argument, a landslide win for the bull. Tom landed support from 22% of the populace, and the remaining 13% simply couldn't settle on a straight winner.
Since that fateful day, CNET stock has lost roughly 22% of its value in fits and starts. Score one real-world point for the bear! The CAPS factor comes out neutral, with a stable but unexciting three-star rating out of five.
So it's a tie in three rounds, or an outright bearish win if all that matters to you is results in real life. As for the options review, the SEC stepped it up to a formal inquiry only last month -- but concluded this week that the company's accounting troubles are over.
Tom got what he wanted there, but it took almost an entire year after his complaint. The tussling twosome wanted some other changes, too, like a return to traffic growth and a boost from the slew of new video game releases needing coverage.
Well, the CNET properties are getting plenty of new readers, with 18% more unique visitors in Q2 2007 than in the year-ago period. But those visitors aren't staying around as long, and total page views fell by 1%, after you back out the woefully underperforming photo-sharing site Webshots. That's no way to grow an ad-supported business.
Rick more recently spun this as healthy revenue growth despite flagging traffic, which would be a good thing. Instead, I see it as a lack of stickiness. Imagine what could happen if each visitor stayed around for a few more page views, given the improved revenue extraction per view. But that ain't happening.
Margins of error
Trailing operating and net margins have hit the skids. The trailing-12-month operating take was 13.1% a year ago, but is only 9.6% today. The bottom line has sunk into 1.6% of red ink, compared to a 5.2% trailing profit margin last year.
Furthermore, revenue growth is coming to a screeching halt. Yes, sales are still growing, but only at an annualized 10.7% pace today. That's much worse than the 15.8% growth rate a year ago, not to mention the heady days of 24% sales growth in 2005.
In other words, that fiscal discipline Tom wanted isn't there, even under new management. And CNET added another 280 employees between the ends of fiscal 2005 and 2006, which can't be good for that restraint impulse.
I'm sorry, Rick, but I have to take Tom's side here. There just isn't enough there there -- no evidence that CNET knows how to get out of these doldrums. News.com and CNET.com itself are starting to look marginalized by the blogging explosion. Sure, there are company-run blogs, too, but that's not the point. CNET used to be the source for certain kinds of news, views, and reviews. Now, other writers have stolen a slice of that pie.
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