In a blog post today on VentureBeat.com, Stephen Walker The CEO of Perfectmarket.com chats about DemandMedia’s IPO and concluded:
“I can now envision a scenario wherein Demand Media, whose properties include eHow, LiveStrong.com, and Cracked.com, is worth $1.4 – $1.7 billion. Not bad when you consider that the equity of the New York Times Company is currently valued at $1.2 billion. ”
This is quite different than what Wired.com had to say about Demand’s anticipated IPO.
To come up with that valuation Mr. Walker looked toward Internet Brands which just got a buyout offer of $640 million.
“Internet Brands had around $100 million in revenue and $20 million in EBITDA in both 2008 and 2009.”
“It appears that company management has done a commendable job in cutting expenses in 2010 and should finish the year with around $26 million in EBITDA with some growth in revenue.”
“Demand Media is growing at a pace of 25 – 50% depending on which financial metric you choose to use (revenue, operating cash flow or OIBDA). Internet Brands grew at a 10% – 30% rate using the same metrics”
“Clearly Demand Media deserves some sort of premium for its higher growth rate, assuming you believe it is sustainable. I ran a simple “what if” scenario to see what the company would be worth with a 10% and a 20% valuation premium based on its higher rate of growth. When you apply these premiums, Demand Media’s valuation increases to $1.6 – $1.7 billion.”
“The company has two primary lines of business: a domain registrar business and a content creation business.”
“Demand had $114 million and $198 million of respective revenue in those two lines of business in 2009.”
“The domain registrar business, which includes the practice of “domaining,” or owning and monetizing domains with intrinsic value, is highly competitive and, in my opinion, unlikely to grow rapidly.”
“If that was Demand’s only line of business, then I think growth rates akin to Internet Brands would be the target.”
“However, a bulk of the company’s growth is likely to come from the content creation business. Demand Media has developed a content creation process that allows it to rapidly and cost effectively develop articles on topics that are likely to drive traffic from search and, for its branded content sites like Cracked and LiveStrong, from social media.”
“If you believe Demand Media has created a new media model that will help it sustain more rapid growth rates, the company is likely worth north of $1.7 billion. My belief is that reality is somewhere in the middle. Only time will really provide the answer”
All and all an interesting read and you should check out the entire article.
Just as a side note although Mr. Walker says that the company “Demand Media likely to price its IPO within a matter of days” my sources tell me no date has been set for the issue to hit the market.
Finally I’m not sure that Mr. Walker knows about and/or fully understands the new gTLD space and the effect that Demand’s Enom could benefit from the rollout of hundreds or thousands of new extensions or that Demand is well situated to become the registry of a ton of new gTLD extensions.
26 Million EBITDA gets you a 1.7 BILLION valuation?
Can you say: “bubble!” ?
Look at the mass coverage of these domains..i don’t think it is a bubble thing..look at the links ,audience and the increasing revenues..
I hate any companies without a diversified earnings stream.
I see no durability in any of their brands, most of their content is trash and should a few people at a search engine here or there decide to change a few numbers in an Algo, the entire operation eats shit.
Not to my own investing tastes, but you have to admire them for making hay while the sun shines. How long that sun continues to shine is yet to be seen but there is absolutely nothing about them that trigger my own value-oriented hackles.
You raise an interesting point about the potential for growth in the domain business. Admittedly, I don’t know a lot about what is going to happen with top level domains, but I do know people that run domain businesses and they are all finding it very competitive and slow growth. Why is that going to change with gTLD? (I ask out of honest curiosity.)
Their content creation business is actually really interesting. I don’t know any other major player that’s doing anything similar to them. The valuation is based on the revenue and future growth, rather than EBITA.
As far as I know – Internet Brands follows a traditional content generation model – either hire content developers / writers in house, or grow user generated content (UGC) in forums. Demand Media keeps a pulse on what people are searching for, and measures it against what is available in the market, and commissions development of the low hanging fruit.
http://www.wired.com/magazine/2009/10/ff_demandmedia/
http://www.demandstudios.com/
As much as I loathe them as a registrar – I think the whole concept of what they are doing on the content side is quite interesting.
Do I like them enough to invest in their IPO? … nah 😀