The Problem with WebMD

Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

WebMD (NASDAQ: WBMD) is a health information service best known for its website of the same name.  This company has been very popular lately, with visits up nearly 50% in the last month.  Yet this company has a serious problem.  I believe Jim Cramer said it best: "This is expensive, and it doesn't make a lot of money."

As an investor, I am very interested in the bottom line.  Sometimes the bottom line is good.  That makes me happy.  Sometimes the bottom line is bad.  I want to know how it is going to get better.

So what is going on with WebMD?

The Money

Perhaps we should start by asking ourselves the question, "how does WebMD make money?"

The main source of revenue for WebMD is through advertising.  Several companies, especially pharmaceutical companies, pay to advertise on their websites, and in other publications, such as WebMD's magazine. 

WebMD also creates revenue through products such as health related content for individuals, and technology for people like doctors.  However, these sources of revenue pale in comparison to the revenue created through advertisements.

By deriving the majority of their revenue through advertising, a comparison could be made with Facebook (NASDAQ: FB).  Facebook made 84% of their money in their most recent quarter through advertising.  Total ad revenue was $1.33 billion, an increase of 41%.  But while Facebook has been growing revenue, WebMD has been losing it.

<img alt="" src="" />

WBMD Revenue TTM data by YCharts

What is interesting is web traffic has been growing for WebMD.  "In 2012, The WebMD Health Network reached an average of approximately 110 million monthly unique visitors and delivered approximately 10.16 billion page views during the year, increases of 29% and 26% over the prior year, respectively" (annual report).  Now, normally you would expect more web traffic to grow into greater revenue.  But WebMD has been noticing a shift in internet usage.  They say that 1 out of 4 users are accessing their information with mobile devices.

Groupon (NASDAQ: GRPN) has noticed this major shift as well.  In 2012 mobile internet access to Groupon increased 40%.  Groupon's revenue comes from agreements with business.  Groupon promotes a deal, and if the consumer takes advantage of the deal, Groupon makes a certain percentage.  This increase in mobile activity is no threat to their business.  They have apps to get the deal information out there.  

Facebook has also been taking the mobile bull by the horns.  Facebook's mobile ad revenue doubled in the most recent quarter, and now represents 23% of total ad revenue.  But this is not the case with WebMD.  

"...if users access our services through mobile devices as a substitute for access through personal computers...our financial results could be negatively affected."  The mobile access just isn't as lucrative for WebMD as traditional internet access.

The Street Party

However, Wall Street has been celebrating the results from the most recent quarter.  Here are the highlights:

  • Revenue down 12%
  • Net loss of $6.1 million (down from $19.2 million profit)

Doesn't sound like much reason to celebrate.  But to be clear, the Street isn't celebrating these numbers.  They are celebrating the 2013 guidance.

  • Revenue $430-$455 million
  • Net loss of $0.13-$0.45 per share

Both of these guidance numbers are better than what Wall Street had hoped for.  They were predicting revenue of $418 million, and a net loss of $0.29 per share.  While WebMD's guidance was perhaps better than the Street predictions, I would like to point out that both of these statistics still look pretty bleak.  Revenue for 2012 was $469 million.  So basically, this company issued guidance that revenue would decrease for the year, and this sent shares skyrocketing nearly 50% in a month.  Only on Wall Street...

Final Thoughts

The stock isn't without its believers.  Most notably Carl Icahn holds a pretty significant amount of shares.  For me, I like the simplicity of Cramer's argument: this company isn't making much money.  And what's more, it plans to keep making less money next year.  With a market cap of nearly 3x next year's revenue, this isn't the kind of stock that I want to be carrying around in my portfolio.

Jon Quast has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus