As you know Demand Media went public this week closing around $20 a share after getting to as high as $25 on its opening day.
There is a lot of debate concerning what the proper valuation of Demand is from inside and outside the domain industry.
SeekingAlpha, a site that focus on investing and the stock market in general, published a story on Thursday when Demand Stock was trading at $22.65 (closed Friday at $20.44), entitled “The Bubble is Back: Will Demand Media Go Below $10?”
SeekingAlpha starts the story with the observation that at “$22.65 a share, Demand has a valuation in excess of $2 billion bigger than the New York Times”
Making its case that Demand Media shares are worth less than $10 a share, they say:
- Demand, currently unprofitable, trades at close to 10x trailing 12 month revenue. Companies with this multiple almost never have a positive return over the next 12 months.
- Demand’s traffic is largely driven by search engines, which can change their algorithms. In fact, Demand’s growth business – content farming – is under attack by Google (GOOG) their largest traffic source.
- Demand’s largest individual business is a registrar called Enom. This is a commodity business that has a zillion competitors – old stars like Register.com, Yahoo! Domains (YHOO), and Network Solutions are all small players now. According to Webhosting.info, Go Daddy is the biggest player in the industry with over 31% market share. Enom is second with 8.5%. Tucows (TCX) has 6.6% – about 20% fewer than Enom. Tucows is publicly traded and has an enterprise value of. $36 million. It trades at less than 0.50 times revenue.
- As for comps for the content side of demand’s business, try: IACI (Ask.com), ANSW (answers.com) and MCHX (lots of high traffic domains). IACI, with an EV of $1.6 billion (less than DMD), trades at an EV/Revenue of 1. ANSW, with an EV of $40 million, trades at an EV/Revenue less than 2. MCHX, with an EV of $300 million, trades at an EV/Revenue of 3.3.
“Since Demand is still unprofitable, the easiest way to value it is with revenue comps. Content & Media had TTM net revenue (ex-TAC) of $125 million. The Registrar had TTM revenue of $97 million. Lets be generous with Demand and give it an EV/Revenue of 5 for the Content & Media and 2 for the Registrar. That gives us an EV of $820 million. Add back $105 million in cash ($76.5 mil from IPO and $29 mil on balance sheet) and you get $925 million. That equates to about $10 a share. It looks much worse if you use realistic comps – I could make a case for <$5 a share.”
“Once again, Demand has generated lots of revenue and traffic growth. It may continue to do so and, heck, start profiting too. Nonetheless, the stock is massively overvalued in any scenario.”
Well of course that is just one opinion, you could argue that while the comparison to Tucows while a natural one, is unfair as Tucows trades at a PE of just .5 times revenue, while most tech stocks trade at a PE of 25+, and therefore Tucows is so ridiculous under priced that the comparison is unfair.
You could also argue while the New York Times is the King old school media, what is the future of old school media and what company will have a brighter future?
Of course no one knows for sure what the value is of the company and the market re-value shares of every company almost on a daily basis.