Update: Demand Media Reports Q3 Earnings But Is Still An Avoid

Summary

• DMD managed to beat 3Q earnings expectations.
• The recent selloff confirms our thesis that DMD is not worth owning at any levels.
• We noted that the company would have issues given the shift to mobile.

Demand Media (DMD) posted 3Q earnings of $0.02 per share loss (topping consensus of a $0.15 a share loss) and revenues of $41.3mm (beat expectations of $39.5mm). Its CFO is exiting at the end of 2014. Revenue fell 19% y/y and EBITDA was down 40%. This comes as traffic fell, and although marketplaces revenues were up, it's a lower-margin business. Along those lines, content and media visits were up 20% y/y. Marketplaces transactions were up 38% y/y.

But the company is still expected to post a loss of $0.16 a share for 2014. That loss is expected to widen to a $0.30 a share loss in 2015 and sales in 2015 are expected to be down 10% y/y.

Shares are down 17% over the last week.

We covered DMD after 2Q earnings and back in 2013. At the time we noted,

The biggest headwind (for some a tailwind) for many Internet-based companies is the shift to mobile. Shares in Facebook dropped after its IPO over mobile monetization concerns and have rebounded as the company performed better than expected in increasing its mobile advertising. Unfortunately, Demand Media has the same problem and hasn't fared as well.

We still don't like the business, but admit it's tough to be a short with it trading at 4x EV/EBITDA and 30% of sales. We're still avoiding DMD and will play wait-and-see on how the company plans to generate a profit.

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