Travelzoo's Getting Stronger While Demand Media Flounders

Includes: LFGR, TZOO
by: Intelligent Speculator

With only 1 month of stock picking left for me in 2011 (read about my reasons here), I am trying to get the most out of what is left; as such, today’s stock pick might be a surprising one for some of you. I usually do not trade recently turned companies because of the time required to get a feeling for a company, but today I’ve decided to jump ahead as I’m getting a good understanding of how Demand Media operates. While the stock is down a lot already so far this year, I do get a feeling that it will keep going down. Yes, its business is that bad.

Let’s take a look at the numbers that we used:

Ticker Name Price EPS PE Next Year Return YTD Sales Growth Analyst rating Book Value Beta
TZOO Travelzoo Inc 52.8 0.8 25.86 27.61 20.02 4.67 2.29 1.28
DMD Demand Media Inc 10.14 -2.86 25.35 N/A 27.45 4.3 5.3 0.64

The main number that I was looking for was next year’s P/E. It’s unthinkable to me that these two companies trade at an almost identical P/Es when one of them is so much more vulnerable, has an inferior business model, less operations efficiency, etc….

Trend Analysis

Both stocks have negative technical momentum, as you can see below from their trend analysis scores. You can also see the stock charts a bit lower in this post (click to enlarge images):

Long Travelzoo (NASDAQ:TZOO)

Travelzoo has certainly had a nice run in recent months as it continues to show how healthy its business has been. The key, of course, has been the way it operates its deals and its “unique relationship” with its customers, mostly through email. That has translated into solid growth and, in a way, I would say that Travelzoo was ahead of the new tendency of companies like Groupon (NASDAQ:GRPN) and LivingSocial. I do expect Travelzoo to continue its growth for years to come, and have been truly impressed by its focus. Last week, Expedia (NASDAQ:EXPE) announced very solid earnings, signalling that the travel industry is still going strong. That will turn out well for Travelzoo, without a doubt.

Short Demand Media (DMD)

To say that Demand Media has had a difficult time as a “public company” would be a major understatement. A few weeks after an IPO where questions were raised about Demand Media’s reliance on Google (NASDAQ:GOOG) and its search engine traffic, it was slapped by Google when new search engine algorithms were introduced that penalized “low quality” content.

It’s not a very good sign when your content is seen by everyone as being part of that approach. To be fair, sites like eHow (DMD’s biggest property by far) do have a lot of unique and useful posts, but the entire business model is not a great one and not only is DMD very reliant on Google, but it faces competition from dozens of other “content farms”. Do I think DMD is doomed? Not at all. But do I think it can grow anywhere close to Travelzoo? No.