IPO Analysis: Demand Media

Jan.21.11 | About: Demand Media (DMD)

Demand Media's $113 million IPO with a market capitalization of $1.2 billion at the price range mid-point of $15 is scheduled for Wednesday, January 26, 2011. Six others are scheduled for the week of January 24, totaling $3 billion.

Demand (NYSE:DMD) operates the 17th largest web property in the United States, and attracted over 105 million unique visitors with over 679 million page views globally for the month ended November 30, 2010. Growth is driven by web content generation and distribution, and it has over 13,000 contributors.

Valuation: DMD expects income for the December 2010 quarter to be between -$100,000 and $2.4 million. At the earnings range mid-point, DMD would sell for $258 earnings; very high. On the other hand, the quarterly growth in top line revenue is impressive, and a profitable December quarter would be the first in DMD’s history.

Content and distribution revenue continued to increase to 63% of total revenue for the December quarter. Revenue from owned and operated websites was up 47% for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009.

For all of 2010, DMD generated sequential quarterly top line revenue of $54 million, $60 million, $65 million and $73 million. Gross margin for the September quarter increased to 49%.

Additional information can be found here.

Conclusion: DMD appears to be on a hockey stick growth curve for the foreseeable future, and will likely seem expensive for some time, based on traditional valuation metrics.

Principal competitors in its space include traditional Internet companies like Yahoo (NASDAQ:YHOO) and AOL, both of whom are making significant investments in order to compete with aspects of DMD’s business. In 2010, Yahoo acquired Associated Content, an online publisher and distributor of original content. Associated Content allows anyone, both paid and non-paid content creators, to publish content in any format, and connects the content to consumers, partners and advertisers. In 2009, AOL launched Seed, a content and media platform that helps create online content for distribution across all of AOL's properties.

Additionally, DMD competes with web portals that focus on particular areas of consumer interest such as Glam, WebMD and About.com for online audiences and marketing budgets.

In terms of registrar competiiton, principal competitors include existing registrars, such as GoDaddy, Tucows and Melbourne IT, and new registrars entering the domain name registration business.

Use of Proceeds: $56mm from 4.5mm shares by DMD. Selling shareholders intend to sell 3mm shares. For content, international expansion, working capital, product development, sales and marketing activities, general and administrative matters and capital expenditures. DMD currently anticipates that aggregate investments in content during the year ending December 31, 2011 will range from $50 million to $75 million.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.