MorningWord 2/10/15: We Have Seen This Movie Before

by Dan February 10, 2015 9:33 am • Commentary

This morning (COUP) is down 30% in the pre-market after guiding the current quarter sales to $53 million missing the consensus estimate of $66 million, or by 20%.  I don’t know jack about COUP, but it looks a lot like an online advertising model, click a coupon they get paid, use a coupon they get paid more:



Another earnings related flop in the last week that highlights an emerging trend in online ad sales was YELP whose stock has declined 28% since Thursday’s weak guidance.  But not to worry, the company is going to hire a lot of people to sell more ads online, Per BusinessInsider:


And then there is Pandora, the streaming music provider, whose shares dropped 17% on Friday after issuing disappointing guidance. Again aside from the roughly 5% of their 81 million users who actually pay a subscription for the service, the rest are monetized through — you got it — online ads.

On their conference call CEO Brian McAndrews had the following to say regarding Ad Sales, per Bloomberg:

“The company would invest all additional margins in the coming year into operations as it tries to pry away more of the advertising dollars that go to traditional radio broadcasters. Ad sales grew 36 percent to $220.1 million from a year earlier, while subscriber and other revenue gained 24 percent, the company said.”

For those that lived through the dotcom boom and bust of the late 1990s/early 200os, this sort of behavior should be familiar. Seeing these three stocks down about 60% from their all time highs a year ago, offering increasingly worse outlooks and furiously trying to double down on part of their business that is getting squeezed the most.

They all sell products. But they mostly rely on ad dollars from a third parties to monetize their user-base.  We have seen this movie before and we know how it ends. Back in late 1999/early 2000 the Internet bubble began to burst after investors began to doubt whether “getting eyeballs” was a legitimate business plan. Periodically jamming another banner ad onto the site wasn’t going to cut it in the long run. Ultimately the popping of the dotcom stocks took the whole tech industry down with it, the servers and PCs, the component suppliers, the web developers, the software applications etc, etc.

These 3 stocks look dead, and if they ever come back it will take years. I suspect businesses like Pandora will survive for some time, but they will have to learn to live with suboptimal conditions, and will likely be taken under, rather than over for a premium (think Napster).