MySpace is the newest hot spot

MySpace is the newest hot spot

By Bambi Francisco
CBS.MarketWatch.com

December 6, 2004

SAN FRANCISCO (CBS.MW) -- Social networking sites are just like hot new restaurants: They're the place to be seen until the next in-vogue destination comes along.

That seems to be the case for last year's popular Internet hangout, Friendster, and the latest attraction -- MySpace.com.

Remember Friendster, the social networking site that rose to stardom last fall because it grew rapidly? Venture capitalists embraced it and lavished it with a $53 million market valuation, when Friendster had negligible revenue but a lot of promise.

Now there's MySpace, a very similar site to Friendster in that MySpace lets people come together and network, learn about each other, find dates and whatever else people do in a networking environment.

The difference is that MySpace seems to be the place with all the promise today.

MySpace surged to 3.4 million users in October, up from 1 million in June, according to comScore Networks. By comparison, Friendster has fewer than 1 million unique visitors each month since June. This compares with 1.75 million unique visitors in October 2003.

MySpace is clearly adding users. And unlike privately held Friendster, MySpace can be invested in through Intermix Media , which operates MySpace and other Web properties.

Some investors seemed to have noticed this tiny company already. Shares of Intermix rose nearly 15 percent Monday to $4.60. There are various reasons for the recent interest. Intermix is beginning to gain some respect as it sheds itself of its old skin. Intermix used to be called eUniverse and had some accounting problems, noted Bill Martin, who founded Ragingbull.com, one of the first message boards on the Web focusing on stock investing.

(Raging Bull, which was generating modest revenue itself, was eventually sold to CMGI and then to Terra-Lycos for an undisclosed amount. Martin also founded Indie Research, which publishes investment newsletters, such as FindProfit.com.)

In mid-November, Intermix hired a new chief operating officer. Sherman Atkinson, who was the COO of Buy.com, took the same position at the Los Angeles-based online media and entertainment group. Atkinson streamlined business operations and instituted costs controls at Buy.com, enabling the company to grow quickly and efficiently, Intermix said. Intermix also reported strong quarterly results in early November.

The question is, is there more upside for this stock?

After today's run-up, Intermix has a market valuation of $140 million. It's estimated to generate $75 million in annual sales, and in its most recent earnings report the company reported revenue of $17.8 million, up 57 percent from the same period a year ago.

Compared with the multiples of other media properties on the Web, this company looks relatively affordable.

It's also modestly profitable, having reported modest operating income in the recent quarter, according to Martin.

Martin started buying shares in Intermix at the end of 2003 when VantagePoint Ventures Partners invested. "At the time we bought this company, it was an ugly duckling. It had the vestiges of eUniverse [the former name of Intermix] and had accounting issues," he said. "When Vantage Point came in, we knew they had a ton of assets, and it was a matter of cleaning up Intermix's story."

So far the investment has been a good one for Martin. And it may still prove to be worthwhile for investors today. There's still interest in this sector, after all.

Consider LinkedIn, another networking site focused on professionals. The company recently received $10 million in funding from Greylock Partners.

Another social networking site, Tickle, was sold to Monster Worldwide earlier this year for $90 million.

Yahoo's dating site and InterActiveCorp's Match.com have shown that sites that attract crowds to mingle and network can be moneymakers.

To this end, Intermix -- a site that's brought together 3 million-plus unique visitors -- is one to watch.

But here's a caveat: The key for MySpace is its ability to sustain the momentum and build a track record.

On the Web, it's easy to be a one-hit wonder.