Positive Sign for Investors: Analysts Initiate Coverage on Demand Media

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It appears as if something came of Demand Media's (DMD) conference presentations last week. Several firms initiated coverage of the company on Monday, with generally positive comments across the board. The following information comes courtesy of Briefing.com's InPlay service.

  • Stifel Nicolaus initiates coverage on Demand Media with a buy and price target of $28. Analyst says "it is very difficult for any company to replicate what DMD has built, especially with the scale to produce millions of articles per year. Additional growth in traffic and monetization can come from social media (e.g., Facebook and Twitter) and the growth of branded ad sales.
  • UBS starts DMD with a buy rating and $29 price target. UBS contends "DMD is well-positioned to take advantage of the fragmentation of online media as consumers increasingly search for more specific long-tail topics."

  • Goldman opens coverage on DMD with a buy rating. (A conflicting report from Business Insider states that Goldman started DMD as a hold).

  • Jefferies begins coverage with a hold and price target of $22.

While I hardly live and die by analyst recommendations, investors should take this initial street coverage of DMD as a major positive sign. Until now, particularly during the company's IPO-quiet period, all investors could find when searching for news on DMD were uninformed hack jobs generated from individuals with scant understanding of the company beyond the tired eHow/Google (NASDAQ:GOOG) search debate. The street seems to be looking past the Google squabble, opting instead to consider DMD's wider-ranging business model and future prospects, irrespective of Google.

As Stifel Nicolaus notes, Demand "says recent results confirm a payback horizon for content investment of less than 15 months..." Translation: After DMD pays overhead for an article (e.g., pay the freelancer, the editor, etc.), it takes less than 15 months for the company to start earning money on that article. Stifel Nicolaus goes on to say while "revenues and traffic from Google is high, the opportunity to extend its platform to mobile, social, and through third-party syndication partners should drive shares higher over the long term." Translation: Somebody at Stifel actually listened to DMD's first conference call and then at some point thereafter received reiteration from the company about its plans.

These plans will lessen DMD's reliance on Google for both traffic and revenue. As Stifel notes in its report, summarized by Briefing and at Business Insider, DMD hired away a Yahoo! (NASDAQ:YHOO) executive to lead advertising efforts.

And it's not all about eHow, DMD-owned sites such as Cracked.com and Livestrong.com already generate promising revenue, which should continue to increase as the company rapidly builds out its direct sales efforts. In plain English, this means that going forward, DMD will be less reliant on viewers of its content clicking on Google ads to make the company money. Instead it will generate increasing amounts of revenue through the ads it sells directly. It's already doing this, however, the effort stands on the cusp of becoming a significant revenue generator that surpasses the numbers it produces thanks to Google.

Stifel also picked up on what Richard Roseblatt discussed on the company earning's call. While Google still drives a majority of traffic to DMD content, the growth the company is experiencing in social media referrals to its sites outpaces search referrals. UBS was listening when Rosenblatt noted that DMD attempts to fill gaps in online content. While eHow articles tend toward the obscure, Rosenblatt pointed out that thousands of people search for answers to the world's most seemingly useless questions to little or no avail. When DMD fills one of these holes with a targeted piece of content, it's at its best.

DMD shares actually dropped on the news. As of midday Monday, shares were trading at $23.79 after hitting an all-time high of $26.46 intraday Friday. For investors with a relatively long-term time horizon this might be the time to buy the dips and position yourself to take advantage of DMD's growth potential. Stifel expects DMD to post a profit of $55 million on revenues of $507 million in 2013.

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

Additional disclosure: I conduct freelance and contract work for Demand Media. I did not provide them with advance warning about my Seeking Alpha articles, nor do I anticipate any consequences as a result.