"A New York investor with a big stake in TheStreet.com (NASDAQ:TSCM) says: 'People are knocking on its door.' He says shares are worth twice their current price, if valued at the 6.5 price-to-sales ratio in the MarketWatch (NASDAQ:MKTW) deal." So read one posting yesterday on a discussion board hosted by TheStreet.com peer Yahoo! (NASDAQ:YHOO).
And so it began. What at first glance looks like a plain-as-day self-serving statement by a "big stake" holder in TheStreet.com sparked a 13% rise in the company's stock price during yesterday's aftermarket hours. But is this truly the "pump and dump" ploy so often seen on those boards? Let's turn to a more useful section of Yahoo!'s Finance site, its company pages, and try to work some comparisons between TheStreet.com and MarketWatch.
Right away, we see that MarketWatch is by far the more valuable piece of Internet real estate, sporting a market cap more than four times TheStreet.com's. There's clearly a perception on Wall Street, therefore, that its namesake is a less valuable piece of property than its watcher. The reason for that perception can be summed up in one word: margins. MarketWatch commands a gross margin nearly 1,600 basis points higher than TheStreet.com's. From that higher starting point, operating costs that chip away at TheStreet.com's profits until its operating and net profits plunge into the red stop short of unprofitability for MarketWatch. After all costs are deducted, MarketWatch still gets to keep a penny of profit for each dollar of revenue it brings in.
Still, it doesn't therefore follow that TheStreet.com is a road to nowhere. When you look at the metric that Fools value most, free cash flow, things don't look so bad at TheStreet.com after all. For as long as it had been public, TheStreet.com had run net cash outflows. But in the first nine months of 2004 it reversed that trend, with the company actually generating more than $1.1 million of free cash flow. Annualize that number, and TheStreet.com is now on track to generate nearly $1.5 million in cash this year.
Don't get me wrong. Thomson (NYSE:TOC) this ain't. (That $1.5 million would hardly pay Thomson's monthly paper clip bill). But consider TheStreet.com's new propensity for generating cash in conjunction with its revenue growth rate that is more than four times MarketWatch's. Together, those two may not make the generally accepted accounting principles (GAAP)-unprofitable company worth "twice its current price" today. But the likelihood is that, given time and continued progress on the free cash flow front, TheStreet.com will be worth more in the future. There's a reason why they didn't name it Cul-De-Sac.com.
Read up on the MarketWatch deal that inspired thehype.com:
Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.
