Demand Media (DMD), a leading digital media and domain services company, is going ahead with its plan to split itself into two separate companies: "Demand Media" for ecommerce and digital content and "Rightside" for domain services.
Demand Media's content and media business has been under pressure lately due to changes in Google (GOOG) search algorithms which caused a reduction in advertising revenue and a decline in the company's share price, which is currently down 44% from its peak for the year.
I believe the eminent business split, combined with the recent acquisition of Society6 artists-powered ecommerce platform are two positive events that could reverse the recent decline in share price and possibly offer a compelling long term investment opportunity.
Recent Revenue Trends
During Q3-2013, Demand Media's content and ecommerce business generated $58 million and accounted for 60% of total revenue. The Rightside domain services part of the business generated $38 million and accounted for 40% of total revenue.
While the media part of the business has seen its revenue decline from a quarterly peak of $68 million due reduction in referrals from Google searches, the Rightside domain service business has been growing slowly and steadily.
Rightside Registrar Business Spin Off
Rightside will be a Washington State pure-play, stand-alone end-to-end domain name services public company and will play a leading role in the historic launch of new generic Top Level Domains (gTLDs). The name represents everything to the right of the dot or, according to the company, the new way to navigate the Internet.
Rightside flagship is eNom , a domain name registrar and Web hosting company that Demand Media acquired in May 2006. Currently eNom has over 15 million names under management, a widely used domain name reseller platform with more than 20,000 distribution partners and an award-winning retail registrar.
eNome also owns a leading domain name auction service, has interest in more than 100 new Top Level Domain applications and sells other products closely tied to domain names, such as SSL certificates, e-mail services, Website building software and gTLDs.
Content & Media Business
Demand Media's content platform has enabled the company to build a relationship with nearly 100 million unique visitors every month. eHow is Demand Media's main content property where experts in every field come together to offer advice on everyday topics.
Currently the community supports over 30 categories and hosts over two million articles and videos. eHow generates its revenue from performance-based cost-per-click Internet advertising, which is basically the part of the business that has been hit by the change in Google's search algorithms.
Demand Media continues to invest in eHow with the most recent investments centering around eHow Now, a community of on-demand experts that answer questions from consumers through live chat channels for a monthly fee.
Demand Media also continues to expand the main eHow property through the addition of new channels, like the recently added Crafts channel and geographically with international content like the recently added eHow en Espanol, a Spanish language version of eHow.
Despite declines in Google referrals, according to Demand Media, eHow remains a top 25 site in the U.S. and is also ranked as a top 25 mobile property with mobile audience contributing over 15 million unique monthly visits.
Demand Media, which already owns its digital content production studio, also delivers hosted content solutions to other publishers and brands such as USA Today.
Society6 Acquisition
In June 2013, Demand Media acquired Society6, a 300,000 member ecommerce marketplace powered by artists, for a total of $94 million; $75 million in cash and $19 million in shares.
Founded in 2009 in Los Angeles, Society6 had sales of $15 million in 2012 and was profitable to the tune of $4 million, operating income. The acquisition is definitely a step in the right direction, will expand Demand Media's addressable market and will help diversify future revenue streams away from performance-based-advertisement.
Competition
Demand Media sees other digital media companies like Yahoo (YHOO), AOL (AOL) and IAC (IACI) as its main competitors in online content and media market space. All of which are much larger than Demand Media and are making significant investments in order to compete in the space.
Financials
For full year 2013, Demand Media is expected to generate $380 million in revenue, a 5% growth at the midpoint compared to 2012 excluding traffic acquisition costs, and to achieve earnings of $0.27 per share, mid-range.
Mid-range EBITDA for the year is expected at $88 million with stand alone margins for Content & Media estimated at 33% and those of Rightside estimated at 7%, both mid-range.
Demand Media Valuation
Demand Media, which ended Q3-2013 with a cash position of approximately $106 million, is currently valued at $486 million, giving a valuation of $380 million to both Rightside domain services and the digital content, media and ecommerce business.
Based on Q3-2013 revenue and growth trends, Rightside could have an annualized 2014 revenue of over $160 million and its IPO could drive an interesting amount of cash to Demand Media's coffers.
If, hypothetically speaking, the Rightside IPO is priced at 2.5 times revenue, then the remaining media and ecommerce business, which has the potential to generate over $240 million in revenue in 2014 at and EBITDA of over 33%, is currently being priced in a negative territory.
Already, the short interests in Demand Media stock have seen a decline of approximately 67% in the past few days. I believe Demand Media has a great digital platform which can be expanded both domestically and globally.
I also believe that Demand Media's shares, at their current price levels, offer tremendous value to discerning investors and present an interesting long term investment opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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