Monday, October 26, 1998
CNET Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %>
Phone: 415-395-7800
Website: http://www.cnet.com
Price (10/23/98): $39
HOW DID IT DOUBLE?
Shares of this techno-savvy multimedia outfit have snapped, crackled, and popped. While CNET has some well-respected computer-related websites, it has also become a sexy Internet play thanks to an alliance with General Electric's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> NBC peacock network. Indeed, news of this deal not only sent CNET's shares strutting to an all-time high of $74 1/2, it also sent feathers flying throughout the Internet sector.
On June 10, NBC announced it was paying $26.2 million ($32.25 per share) for 813,000 shares of CNET as part of a deal giving NBC a 19% stake in Snap! (www.snap.com), CNET's fledgling Web portal site. Snap! now becomes a separate entity. NBC will initially put up $5.9 million for working capital, but it also has an option to acquire up to 60% of the new Snap!
The market liked the news a lot, sending CNET's shares up $12 1/8 to $45 1/8. For starters, CNET had limited cash to spend on the portal. NBC brings not only deep pockets but lots of potential programming from its growing online operations. It's also got a built-in television audience it can leverage to give Snap! a fighting chance in the competitive Web portal space currently ruled by Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>.
The network started running TV promos July 20 with the tag: "Don't suffer from information overload. Snap! out of it! Search the Internet with Snap.com today!" Although the market's recent gyrations have caused investors to snap out of their euphoria, CNET is still squarely in Doublesville.
BUSINESS DESCRIPTION
CNET is a new media company that offers original Internet content and television programming. The bulk of revenue now comes from advertising on its technology-centered CNET Online sites, including Cnet.com (with 700,000 registered users), News.com, Gamecenter.com, Shareware.com, Search.com, Builder.com, Download.com, and Computers.com.
The firm also produces television series exploring technology issues, including CNET Central and CNET-The Digital Domain, both carried by the USA Network and the Sci-Fi Channel. Its TV.Com show focuses on digital technologies and is syndicated in over 115 national markets. Altogether, CNET's TV shows reach about eight million viewers each week.
Snap! is a free online service that aggregates content under a 16-channel format while offering search functions. The portal is featured by more than 40 leading PC manufacturers, major marketers, and Internet service providers. CNET has designed co-branded versions of Snap! for many of these distributors.
As of the April proxy, insiders held 62.6% of the company's stock. Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> owns over 800,000 shares.
FINANCIAL FACTS
Income Statement*
12-month sales: $42.7 million
12-month income: ($22.3 million)
12-month EPS: ($1.61)
Profit Margin: N/A
Market Cap: $658.3 million
(*Includes several one-time items)
Balance Sheet
Cash: $41.6 million
Current Assets: $54.4 million
Current Liabilities: $11.8 million
Long-Term Debt: $2.1 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 15.4
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Though all the Internet stocks present challenges in terms of valuation, it's been clear for a while that CNET was positioning itself as a leading online content provider. Its award-winning news.com technology news site is one of my own frequent stops.
CNET Online has also shown decent growth in page views, which averaged 6.4 million per day in the second quarter, up 68% over last year's results. More importantly, Media Metrix and RelevantKnowledge have both noted that CNET has substantially more unique visitors per month than do other technology publishers, such as ZDNet, the online unit of Ziff-Davis. With tech companies still providing much of the online ad spending, CNET looked quite attractive.
Snap! was both the ace in the hole and the big question mark given that CNET had been selling equity to help finance its development. Would this prove a money hole or a hole in one? GE's move seemed to answer that question.
WHERE TO FROM HERE?
The deal with NBC allows the TV network to acquire up to 60% of Snap! for another $32 million. So assuming Must See TV can turn Snap! into a major online brand, CNET won't get all the benefits. That's especially true since Snap! is likely to go public at some point to finance its growth, leaving CNET with less than a 40% stake.
Even so, much of the post-NBC gains have been lost even as the story has, if anything, only improved. Indeed, the omnipresent Keith Benjamin, the BancAmerica Robertson Stephens Internet analyst, said in an August 4 research report that CNET's "competitive and profitability position now ranks near the top of the Internet stock list." He maintained his "buy" rating with a target of $67 1/2 based on FY2001 earnings of $1.35 per share. At that point, the shares traded for $49 3/4.
Given that Benjamin is looking for just $0.35 per share next year while the nine-analyst consensus earnings estimate is $0.65 per share, it seems likely that CNET now looks inexpensive to Wall Street's analysts. And it might be, even though insider sales by Chair/CEO Halsey Minor and COO Shelby Bonnie picked up considerably with the stock in the mid-$50s in late July.
Of course, Internet investors can lose money in a snap! While CNET looks promising, this is a relative valuation game. Paying 15 times sales for a well-positioned company only makes sense as long as the Internet sector's price-to-sales multiple remains equally rich.
-- Louis Corrigan
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