CNET's Webshots business is slowly but surely losing traffic, primarily as a result of the continued increase in Facebook's popularity. Essentially, Facebook allows users to do almost everything Webshots offers while tying the pictures into the social networking framework which has become so pervasive in today's day and age. As a result, I don't see much hope in recharging the Webshots business to regain its popularity.

Valuation-wise the stock isn't really overvalued here, however I don't think it's particularly cheap either and I believe the negative trends I've outlined above are going to force further multiple contraction. I think there are cheaper stocks in the internet space, and I believe that strong secular growth in the internet advertising space would have much more drastic effects on the valuations of faster-growing internet companies.

There are several potential catalysts for the short thesis. First and foremost, the negative trends behind the stock, mostly continued poor performance from Webshots, weak CPMs, and so on, are going to force Wall Street to have an even less favorable perception of the company. I also think estimates for the company could also be high, forcing further declines in the share price assuming a stable multiple, while I tend to think the multiple is going to continue to shrink.

I think it's important to look at a chart for entering a position like this because even if the fundamentals line up it could be an inopportune time to enter a position. Looking at the chart below, I think the first entry point is several cents below the current price:


If I was entering a short position, I'd start the position once the stock looked as if it would close below "Level 1" on the chart above -- or roughly $7.40 per share. I'd complete the position by shorting the stock again as it broke "Level 2" on the chart above -- or roughly $7.05 per share. These two levels are basically levels of "support" for the stock, meaning the stock will likely show resolution before breaking through these levels and, once it breaks these levels, the stock has "broken down" and has no defined downside.

The primary risks to this trade are increasing popularity of CNET's new sites such as Chow.com and TV.com and the international segment continuing to grow stronger than expectations. However, the company's efforts in these spaces must be extraordinarily successful because I believe simply solid performance from these units is priced into these stocks. Lastly, the stock could be a take-out for a bigger internet company such a Yahoo! (NASDAQ: YHOO) or Google (NASDAQ: GOOG) due to CNET's significant internet marketshare and valuable web properties.

I think CNET, if shorted on a confirmed breakdown, makes sense for aggressive traders. The story behind the stock remains negative in my opinion and I think the downside momentum will continue once the stock breaks Level 1 and, subsequently, Level 2. I would keep my stop around Level 1 if the stock confirmed the breakdown by falling through Level 2.