I believe Demand Media has essentially given up on content farming, the company's core business.
Management seems to have finally completely capitulated on trying to deploy new capital into its golden goose -- content farming. Freelance writers are complaining all over the blogosphere about the lack of work available at DMD studios these days.
It's my opinion, based on conversations with many institutional investors in my hedge fund network, that investors originally ate up the IPO because content farming was generating a 58% IRR on every dollar invested.
To put that into layman's terms, invest another $100 million into new "How To" articles, and Shazaam! Earnings will increase by ~$58 million a year. Frankly, until Google started de-ranking content farms, there was a rational justification for the company's premium valuation.
Google's tweaks have likely swung the content farming IRR from highly positive to a negative IRR. If this were not the case, the company would be negligent not to give their freelancers new assignments. Our latest eHow proprietary data shows that things are getting even worse after the latest Panda revision on October 9, 2011.
Please reference our previous posts to see how numbers have trended over time:
- April 14, 2011 - we broke the news that eHow rankings had started declining; stock was at $21.35.
- June 22, 2011 - broke the news that eHow rankings had dropped again; stock at $14.33.
- We believe eHow rankings have sharply dropped again.
Our crawl data:
- Feb 19 - 1,680 top 10 hits at an average rank of 3.06 (Pre Panda 1)
- Mar 02 - 1,892 top 10 hits at an average rank of 3.05 (Post Panda 1)
- Apr 10 - 1,996 top 10 hits at an average rank of 2.95 (Pre Panda 2)
- Apr 16 - 1,341 top 10 hits at an average rank of 3.39 (Post Panda 2)
- Jun 17 - 1,216 top 10 hits at an average rank of 3.40 (Pre Panda 2.2)
- Jun 18 - 924 top 10 hits at an average rank of 3.56 (Post Panda 2.2 day 1)
- Jun 19 - 924 top 10 hits at an average rank of 3.55 (Post Panda 2.2 day 2)
- Jun 20 - 916 top 10 hits at an average rank of 3.56 (Post Panda 2.2 day 3)
- Oct 9 - 916 top 10 hits with an average rank of 3.62 (Pre Latest Panda Update)
- Oct 10 - 779 top 10 hits with an average rank of 3.89
- Oct 11 - 712 top 10 hits with an average rank of 4.20
- Oct 12 - 666 top 10 hits with an average rank of 4.28
- Oct 13 - 614 top 10 hits with an average rank of 4.39
Our prorietary crawling data showed another steep decline in eHow's search rankings, and is directionally corroborated by Alexa's latest data.
Now Demand Media is essentially a conglomeration of ho-hum sites, and is by my estimation worth $2 a share.
- eNom is worth less than $1 a share if you run the comparable valuation versus Tucows (NYSEMKT:TCX), the best publicly traded comparable, and it's worth $41m, less than 0.5 TTM revenues). Tucows, the #3 domain registrar, is slighly smaller than eNom. Both are an order of magnitude smaller than GoDaddy.
- Cash of about $1.25 a share, as of the latest 10-Q.
I believe that there is far too much competition for internet content out there for a GAAP-unprofitable grab bag of websites to justify the remaining $400 million in enterprise value, which is implied by a stock price near $7.
Remember, the company has to compete for traffic with the likes of AOL (NYSE:AOL), Yahoo (NASDAQ:YHOO), and WebMD (NASDAQ:WBMD) in big league verticals like automotive, flowers, and healthcare, as well as niche sites like ours (NerdWallet specializes in credit cards). There's no longer a proprietary black box zinging out new article ideas that will print new earnings. This means that anyone with a website, even in a low-cost country, can carbon copy eHow's article topics and business model for very little money.
Disclosure: I am short DMD.