A New Way to Play the Video Boom

While ad rates will probably fall next year, this site is poised for an explosion in traffic.
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This column was originally published on RealMoney on Oct. 10 at 7:28 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Video is booming on the Internet. If you're looking for a stealth play on that trend, do some homework on gadget-focused Web company

CNET Networks

(CNET) - Get Report

, which operates numerous popular Internet properties, most notably its flagship CNET.com and leading video-game site GameSpot.com. As a gadget and general technology fiend, I use CNET -- among many other sites -- to find information and reviews about new products and to keep up with countless trends.

CNET's shares are down more than 30% year-to-date, as the company is suffering from an options-backdating investigation as well as a slowdown in user traffic. However, CNET.com and GameSpot.com are likely to see a nice upswing in 2007 due to favorable product cycles.

First, CNET.com could get a serious boost from the release of the Windows Vista operating system, which will generate enormous interest from PC users. Vista will also drive new releases of software and peripherals from any number of companies. Given CNET's popularity, it will probably generate an enormous amount of traffic from people seeking reviews of all these new products.

Simultaneously, we're getting into the heart of a new video-game console cycle, with consoles from

Nintendo

and

Sony

(SNE) - Get Report

on the way this holiday season. Plus, we have the already-successful

Microsoft

(MSFT) - Get Report

Xbox 360 console and Nintendo DS Lite handheld. These products, along with countless software releases, will generate many previews, news items and reviews, driving higher traffic to GameSpot.com.

The kicker here is that much of the new content being created by CNET has video attached to it, and video advertising carriers much higher revenue than traditional banner advertising. In the last generations of software and video games, Web-based video was pretty rare. But these days, new products, especially video games, have multiple videos attached to them, increasing the monetization for CNET's properties. Just take a look at the highly anticipated Xbox 360 game

Gears of War

. GameSpot.com has already posted 12 videos on it, and the game isn't even out yet!

Video ad rates are likely to decrease in 2007, as more and more content owners produce videos, possibly more than advertisers demand. But CNET will probably see a Vista- and game-driven explosion of traffic in 2007 that can make up for lower pricing.

Based on 2007 numbers, CNET shares are not cheap at 32 times earnings and 13 times EBITDA, so third-quarter-related weakness may be a good time for investors to initiate a position. Nonetheless, investors looking for off-the-radar ways to play the boom in Internet video should stick this name on their radar screen.

In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Comeau is a research analyst at TheStreet.com. In this role he performs stock analysis for

TheStreet.com Breakout Stocks

, and is also a regular contributor to RealMoney.com. Prior to his arrival at TSC in June 2004, Comeau worked as a Consultant to Toyota Motor North America, performing in-depth research on automotive industry issues, primarily in the areas of alternative engine technologies, competitive analysis and macroeconomics. His primary market interests include consumer technology, specialty retail, and small-caps. Comeau received a bachelor's degree in Finance from Brooklyn College, and has completed Level 1 of the CFA program.. He appreciates your feedback;

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