Controversy about monetization of revenue and profits at MySpace has held back shares of News Corp so far this year despite outstanding December quarter earnings, increased guidance for the fiscal year ending this June, and commentary from Rupert Murdoch and other senior executives stating that so far the company is feeling any impact from the recessionary conditions in the US economy.
The controversy over MySpace began when Google reported its most recent earnings and said that it was having trouble monetizing social networking traffic. Last week, the controversy heightened when several news outlets reported that Fix Interactive Media, of which MySpace is by far the largest component, would miss its fiscal year revenue target of $1 billion by up to 10%.
Analysts largely took the news in stride by noting that the shortfall would not amount to more than a penny a share and less than 1% of operating income. Most analysts left their estimate of MySpace’s value unchanged at $3-4 per NWS share unchanged.
While I remain bullish on NWS shares, I think analysts are a bit too sanguine. I have little doubt that if MySpace were sold it would fetch at least what analysts expect. However, any reduction in the long-term growth expectations for MySpace would have an abnormally large impact on NWS’s EBITDA or EPS multiple.
NWS Corp is a strong company with excellent operating momentum. Despite concerns about MySpace and the company’s exposure to economically sensitive advertising, the shares have slightly outperformed the market this year, falling just 4.5%. This is a testament to superb operating momentum in the company’s broad array of businesses including SkyItalia, newspapers (yeah, your read that right even if it is cost driven), and cable networks.
I still think the shares should be trading in the $24 range, providing more than 20% upside, but racing that target will be difficult until positive trends and perception re-emerges for MySpace. I plan to be patient.