What Is Demand Media Worth? SeekingAlpha Says $5-$10 A Share

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.

Comments

  1. says

    I am no expert but I can build content and sites like ehow.com. I don’t think they are worth $5 a share but I agree that their current valuation is lofty to say the least. Then again it really does not matter what we all think its what the market agrees on.

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  3. Hennie says

    Mike, I think you make a mistake here by confusing revenue and earnings. You say “the comparison…is unfair as Tucows trades at a PE of just .5 times revenue, while most tech stocks trade at a PE of 25+”
    If Tucows trades at 0.5 times REVENUE then that says nothing about their PE (Price/Earnings). Actually their PE is 18.5 according to http://investing.money.msn.com/investments/stock-price?symbol=TCX so that’s not “ridiculous under priced” compared to different from other tech companies.

  4. Gazzip says

    “The Bubble Is Back”

    I’ll go with the authors title in the article ….Pop, the management are probably cashing in most their shares already.

    Good luck

  5. Gazzip says

    “Unless insiders sell as part of the IPO”

    I read this article that mentions the following, (however you can’t beleive everything you read on the web, there’s so much cybercrap flying about about…which is why I said probably ;))

    “….In contrast, Demand Media chief executive officer Richard Rosenblatt and other insiders are cashing in already: Nearly half the shares sold in the IPO were offered by insiders, with no proceeds going to the company. Mr. Rosenblatt and other executives sold roughly one-tenth of their holdings, even as investors made their company one of the hottest stocks of the week.”

    ctv.ca/generic/generated/static/business/article1887874.html

    ———-

    Is it true? Does it install confidence? Is this normal? Who knows ? ..not me ;)

  6. James says

    The best thing DM could do now, is start finding direct advertisers to take away the threat of the Google algorithm. There is a big margin to be able to undercut Goog and increase profit at the same time. (I am assuming DM don’t have a great deal with Goog at present).

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