Two-Way Traffic at TheStreet.com

Pick a lane, TheStreet.com (Nasdaq: TSCM). You can't have it both ways.

Reporting second-quarter earnings last week, TheStreet.com chose the following as its subheadline: "Expanding Network Drives 32% Year-Over-Year Revenue Growth." While that's true, there’s more to the story. Revenues were up 32%, but profits were down 38%, at just $0.07 per share. How does that work?

Like this
TheStreet posted $19.7 million in revenue last quarter -- 32% growth. Impressively, TheStreet achieved this feat while upping its marketing spending only 19%. Unfortunately, pretty much every other category of spending rose much faster:

Meanwhile, depreciation and amortization spending leapt 263% year over year. Now, management would rather you pay no attention to this 263% behind the curtain. In its press release, TheStreet emphasized a concept it calls "adjusted EBITDA" (a close cousin of "EBE" --  "earnings before everything"). Later, self-reporting its results, TheStreet.com editorial explained away these costs as "related to business combinations" and mere "noncash charges."

But here's the thing, guys. You can't crow over 32% revenue growth, most of which was "bought" growth, and then turn around and disclaim the cost of buying it -- amortized or otherwise. It just ain't kosher.

Or necessary
In fact, TheStreet doesn't need to play semantic games to defend its stock price. After falling nearly 45% over the past year, the stock is finally starting to look reasonable.

Advertising revenue is holding up well, Promotions.com continues to ink deals with partners as diverse as Coke (NYSE: KO), Time Warner (NYSE: TWX), McDonald's (NYSE: MCD), and Verizon (NYSE: VZ), and the company just expanded its relationship with Google 's (Nasdaq: GOOG) YouTube. So far this year, it's all added up to $0.14 per share in net profit, and $4.5 million in free cash flow (FCF).

Now, run-rate these numbers out through the end of this fiscal year, and you get perhaps $0.28 in profits, or $9 million in FCF. Either way you look at it -- P/E or price-to-free cash flow -- the stock looks like it's trading for about a low-20s multiple. Assuming TheStreet can meet analysts' expectations for 20% long-term growth, that's not even a remotely unreasonable price.

Copyright © 2008 Universal Press Syndicate.