PSB Monthly Issue January 2015
January 2015
Sometimes, I think it’s easy for investors to forget just how big the Internet is. Yes, most people realize you can find just about anything you want on the Web. But, they don’t understand just how far reaching a website can be.
A popular website may be viewed by millions of people from all over the globe.
What’s more, those millions of people are millions of potential customers. Every one of those website views could result in someone spending money on the site. It’s one of the reasons why website rankings are so important.
So just how big are some of the markets?
Well, let’s pull some examples related to the company we’re recommending this week.
Let’s start with consumer media. For instance, the do-it-yourself and home improvement market is $700 billion! And, the fitness and nutrition market is $500 billion!
What about standard content marketing? That’s over a $45 billion market.
Clearly, we’re talking about massive market potential here. And, it’s all about the websites. Once a company gains traction with a particular website, the momentum can just keep it growing and growing.
That’s where Demand Media (NYSE: DMD) comes in.
Key Investment Data
Name: Demand Media
Ticker Symbol: DMD
Market Cap: $102 million
Recent Price: $5.29PSB Rating System: 4.7 Stars
Raging Revenue: (4.3 stars) The company saw a significant increase in mobile ad sales as well as a 38% year-over-year increase in Marketplace revenues.
Beautiful Books: (4.8 stars) DMD has over $113 million in cash compared to $74 million in debt. The company’s current ratio is a very strong 4.1x.
Stellar Structure: (5.0 stars) The company’s insider ownership sits at 50%. Institutions own another 44%. Overall, it looks like the smart money is heavily subscribed into DMD shares.
Valuation Verification: (4.9 stars) DMD is trading at just 0.28x revenues and 0.80x book value. Given the valuation, the shares could climb 90% or more.
Meaningful Milestones: (4.7 stars) The company’s websites are a combined #25 overall in the US according to comScore. eHow.com has over 40 million unique visitors and Livestrong.com is a top 5 health and fitness website
THE DIVERSIFIED MEDIA BUSINESS
DMD is a diversified media and technology company. It connects individual content creators and artists to large consumer audiences across various lifestyle categories.
Basically, the company offers content and media services. DMD provides an online content creation studio, which publishes content to its online properties and customer-operated online properties. The idea is to provide customers innovative ways to reach their customers and expand online presence.
Much of Demand Media’s business comes from their Content & Media division. This unit operates leading online destinations such as eHow.com and Livestrong.com. eHow.com is a do-it-yourself website and is one of the most visited sites in the US (top 30 overall in 2014). Livestrong.com is a fitness and nutrition site that is the #5 most visited health site.
Those are both huge Internet draws… and huge moneymakers.
DMD also has a Marketplace division, where users can sell their items to each other. The company operates Society6, where artists market and sell their designs. This unit provides less than 20% of the company’s overall revenues, on average.
Back to Content & Media, this area is where DMD truly shines.
On a consolidated basis, the company’s web properties ranked #25 in the US according to comScore. eHow.com by itself had a whopping 42 million unique users worldwide. Livestrong.com added another 19 million unique users.
Perhaps even more importantly, DMD websites came in #37 for US mobile web properties, with 29 million unique users in the US. With more and more people shifting to mobile browsing as their main source of web usage, that’s an encouraging statistic.
With DMD websites growing rapidly, and in all the right places, there’s a very good chance the company will see significant revenue growth in 2015.
THE NUMBERS
Speaking of revenues, the company pulled in $41.3 million last quarter, with an adjusted EBITDA of $8.1 million. Although only accounting for about $8 million of the total, Marketplace revenues climbed 38% from last year.
While Content & Media revenues declined, the reasons are not all bad. You see, mobile ads don’t generate as much revenue as display ads. As such, the company saw a lower yield because of the rapid growth of its mobile advertising sales. Ultimately, this will be a good thing because mobile ads are where the future is for this business.
In the meantime, the company boasts a rock solid balance sheet.
DMD has $113 million in cash compared to $74 million in debt. Their current assets are also a robust 4.1x current liabilities. In other words, the company has plenty of cash and a strong balance sheet for expansion or acquisitions.
INVESTMENT RISKS
As with any small cap investment, DMD does have a few risks.
A slowdown in the overall economy could lessen the amount consumers spend on advertising.
Additional competition in the space could make it harder for the company’s websites to continue growing at a rapid pace.
Finally, changes in demand for mobile ads could alter the strategic direction of the company and increase costs or slow growth.
POTENTIAL RETURN OF 90% OR MORE
Given how popular DMD’s websites are, along with the company’s solid growth in mobile ad sales, you’d think investors would be all over this stock.
Yet, the shares are trading at just 0.28x sales and 0.80x book value.
So, if DMD was broken into pieces and sold, it would be worth about 25% more than it is now. Perhaps more compelling, even a has-been Internet giant like AOL (AOL) trades for about 1.5x sales. Clearly, DMD should be priced higher.
Based on our analysis, we see DMD climbing to $10.00 a share or more. Buy the shares now for potential gains of 90% or more!
ACTION RECOMMENDATION
BUY Demand Media (NYSE: DMD) up to $5.75 per share.
Recent price is $5.29
Use a stop-loss of $3.75 on this position.
Don’t forget your position sizing and stop-loss rules.
Portfolio Update
Here are some highlights from the past couple weeks…
- Glu Mobile (GLUU), Brightcove (BCOV), and MicroFinancial (MFI) all reached new highs since our last update.
- Gain Capital (GCAP) issued a $0.05 per share dividend on December 10th effectively lowering our buy price to $6.33.
- The collapse in crude oil has brought down Profire Energy (PFIE) along with it. However, PFIE is still a decent company worth holding for the long-term. As such, we’re lowering our buy-up-to price to $3.00.
Category: PSB Monthly Issues
