$1 Billion MySpace Valuation Highlights Facebook’s Dominance, But News Corp Stock Still Cheap

News Corp (NASDAQ:NWS) is a media conglomerate that competes with New York Times (NYSE:NYT), Time Warner (NYSE:TWX), Disney (NYSE:DIS), Viacom (NYSE:VIA) and CBS (NYSE:CBS) in a variety of businesses ranging from broadcasting and cable networks to filmed entertainment and publishing. The company also owns the social networking website MySpace. Our price estimate for News Corp stands at $20.17, which implies a premium of over 20% beyond market price.

News Corp acquired MySpace for $580 million in 2005. At that time, MySpace might’ve been considered one of the more dominant social networking platforms available. But the tides have turned. It wasn’t until early 2008 that Facebook reportedly surpassed MySpace in monthly unique visitor totals, but Facebook hasn’t looked back since, leaving MySpace in the dust. ^[1] MySpace’s struggles have continued as Facebook has continually gained momentum. While Facebook has more than 500 million users, MySpace’s count appears to be less than a third of that (at under 150 million). ^{[2] [3]}

MySpace Valuation

We estimate that MySpace constitutes roughly 2% of News Corp’s stock value, which by our analysis puts its equity value at about $1 billion. Compare this to Facebook’s valuation implied by a recent Goldman Sachs (NYSE:GS) investment and the game isn’t nearly as close as total user statistics might make it seem. Goldman’s investment implies a whopping $50 billion value for Facebook. ^[4]

Clearly MySpace is no longer in Facebook’s league. So what is News Corp doing to stop the bleeding? It seems like a more targeted approach, coupled with cost cutting, is the new gameplan.

Strategic Change and Business Trimming

News Corp officials have amended their strategy in regards to MySpace with a more targeted focus on functionality. The company has been looking to redesign the site as part of a transformation from a social networking focused site to a network for promoting music and video content. The strategy also involves leveraging the user database of competitors, like Facebook. This could be a significant move for the site as it would alleviate direct competition with Facebook. If you can’t beat ’em, join ’em.

News Corp also announced that it will reduce MySpace’s workforce by nearly 50% with the termination of roughly 500 employees. ^[5] With the prevailing issues concerning MySpace’s profitability and growth potential, the move could create a bit of breathing room on the cost side for the site to adapt towards its strategy.

However, MySpace remains just a drop of water in the ocean for News Corp. As MySpace contributes a mere 2% to our estimated stock value for News Corp, the upside impact from a site re-design is minimal. On the flip side, despite media attention on continuing financial struggles at the site, the potential downside impact should be little cause for concern to investors.

Drag the trend line in the modifiable chart above to see how various EBITDA margin scenarios for MySpace could impact News Corp’s stock value.

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1. Facebook: Largest, Fastest Growing Social Network, techtree.com, Aug 13 2008 [↩]
2. Facebook Statistics, Facebook press release [↩]
3. MySpace Profile, crunchbase.com [↩]
4. Goldman Values Facebook at $50 billion, Digital Sky Technologies Makes 400% on its Investment Since 2009!, wallstreetoasis.com, Jan 3 2011 [↩]
5. Myspace Layoffs Slated for Tuesday, The Wall Street Journal, Jan 10 2011 [↩]