Media Recession Putting a Hurt on Internet Media

Clearly things are amiss on Wall Street and Main Street, but Madison Avenue is not fairing much better.

The wrenching changes in the publishing business have clearly taken a toll on old line media companies, but the new breed of web based publishers are struggling as well. Certainly financial bloggers are reaching the end of their rope after months, if not years, of work without the commensurate reward. Several bloggers wielding pitchforks and torches threatened to boycott aggregator Seeking Alpha, demanding a cut of the action the site receives from their advertisers.

Bloggers have done a particularly poor job of monetizing their traffic, and the wind is in their face. Lots of whining, but few solutions. If ThinkPanmure is correct, continued patience might be required:

Last week, ThinkPanmure hosted its Fourth Annual Internet Media Dinner with a focus on financial media...The financial media representatives in attendance agreed that we are now in the midst of a "media recession," entailing more caution among advertisers, fewer incremental budget flushes, shorter campaigns, and more limited visibility into future revenue. At the same time, attendees were quick to highlight their expectations for the current recession to be both short and shallow, pointing to improved growth during 2H08. ThinkPanmure

While consensus estimates appear to agree with this view (roughly three-quarters of the companies we cover need to drive accelerating growth to meet consensus revenue estimates for the remainder of the year), we believe the media recession could be deeper and last longer than many expect, especially for categories where lower-priced advertising alternatives (e.g., vertical ad networks) are emerging.

The emergence of vertical ad networks might eventually put some money in the pocket of destitute bloggers, but could exacerbate the woes on Madison Avenue:

Participants seemed to be uniformly bearish on horizontal ad network models, expecting that vertically-focused ad networks will gain share in coming years (we note that one of the participants, Forbes.com, operates a publisher-sponsored vertical ad network). While we believe that the rising tide for non-premium display advertising is strong enough to raise both horizontal and vertical network models, we agree that vertical networks are likely to grow more quickly than horizontal networks over the next two to three years.

The demise of defined pension plans was cited by several participants as one key long-term trend, as consumers get up to speed and monitor their net worth in real time.

TheStreet.com (TSCM-NASDAQ) is positioning itself to cash in, but the stock’s upside appears to be capped, according to ThinkPanmure:

Media companies with similar cash flow attributes to online media companies like TheStreet.com have historically traded at free-cash-flow-multiple-to-growth ratios in the 1.0-2.0x range. Balancing TSCM’s higher risk profile and our expectations for below average growth rates over the next year with our belief that TSCM remains an attractive long-term (three to five year) growth story for investors, we believe that TSCM shares should trade toward the low end of that historical range. Using a multiple- to-growth rate in the 1.2x range against our forecast for TheStreet.com of a 14% CAGR in FCF/share over the next three years, we derive a 2009 FCF multiple in the 17x range. At 17x our fully taxed 2009 FCF/share estimate of $0.47, we arrive at a target value for TSCM shares in the $8 range

While we believe that TheStreet should be able to continue to grow its advertising revenue during a recession, its growth rate could decelerate materially below our current forecasts for 20% Y/Y growth in
2008 (10% organic). At 10x our $21 million 2009 adjusted EBITDA estimate, we arrive at a target enterprise value for TheStreet.com in the $210 million range. After adding in roughly the $100 million in cash and equivalents that we expect TSCM to have accumulated over the next year and $35 million for the net present value of the company’s outstanding NOL balance, we arrive at a target equity value for the stock in the $350 million range, or $10 per share. We arrive at our $9 single-point price target using an average of the two methodologies above.

Shares of comScore (SCOR-NSADQ) offer upside to their $36 price target, but their CEO is relatively cautious on e-commerce trends, noting that consumers have become much more price conscious, with high-end retailers getting particularly hard hit by the retrenchment of the consumer, and club stores and discounters muddling through.

Of course, no discussion of internet advertising would be complete without discussing Google (GOOG-NASDAQ), and shareholders should sleep comfortably, at least if you buy into the valuation methodology ThinkPanmure uses. One surprise is that Google’s stock has the lowest beta of any stock in their media universe:

Balancing its lower risk profile—Google has the lowest Beta of any stock in our universe—with its above-average growth profile, we believe that GOOG shares should trade toward the high end of that historical FCF multiple-to-growth range. Using a 1.6 multiple against our forecast for Google to grow its FCF 22% annually over the next three years points to a 2009 FCF multiple around 35. At 35x our 2009 FCF/share estimate of $19.11, we arrive at a target value for GOOG shares in the $670 range....we believe our target EV/EBITDA multiple of 17 against our 2009 EBITDA estimate of $10.9 billion is reasonable after balancing the company’s industry-high growth rates with some of its unusual and unique risks.

At 17x our $10.9 billion estimate, we arrive at a target enterprise value for Google in the $185 billion range. After adding in the $16.3 billion in cash and equivalents that we expect the company to have accumulated a year from now, we arrive at a 12-month target equity value for the company of approximately $200 billion, or approximately $630 per share. Our single-point $650 per share valuation target for 12 months from now is derived by taking an average of the two target valuations.

Yes, it is tough out there, and until the media recession blows over, financial bloggers might want to tighten their belts a notch. Advertising budgets are being whacked nearly as fast as traders and analysts on the SellSide as the perfect storm hits blogStreet.
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

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