Demand Media (DMD) just did its initial public offering of stock on Wednesday, January 26, 2011.
For those of you that don’t know the company, it owns a series of websites (such as ehow.com) that contain many thousands of articles primarily written by low-paid freelance writers, articles designed to rank high in Google and other search engines for currently popular search terms. The sites run advertising, a key source of Demand Media’s revenues.
Many, many other bloggers have examined the pros and cons of writing freelance articles for such content farm/content mill sites. I won’t rehash those arguments here.
My purpose is to point out why I think buying Demand Media stock is likely a bad idea, especially for long-term investors. I’m no expert on picking stocks; however, I have been buying and selling stocks, ETFs, bonds, and mutual funds since 2005.
So, from my personal investing rules, here are…
3 Reasons Why I Won’t Buy Demand Media Stock
1. Demand Media Is Losing Money
I don’t buy the stock of a company that’s losing money. Some companies that are losing money now are well positioned to make a lot of money later and could be a good investment. Many, many others continue to lose money, keep trying to find more financing, issue more stock, and eventually spiral down into a penny stock, perhaps to disappear forever. Yet others muddle along for years losing money. It’s not clear what DM’s path will be.
Update: Demand Media was profitable in the fourth quarter of 2010. There’s good analysis in this article, along with this summary:
DMD turned a profit of $1 million in the last three months of 2010, however, because of the conversion of preferred shares to common stock as part of the firm’s recent IPO, the books show a loss of $7.6 million, or 54 cents per share. The $1 million profit compares with a loss of $3.9 million in the prior year period. Revenue for the fourth quarter hit $73.6 million, marking a 33-percent year-over-year increase.
2. Demand Media Is Overvalued
Determining the value of a company that’s losing money is a bit complicated, so I’m relying on the analysis of Kevin Berk at Seeking Alpha in his recent article “The Bubble Is Back: Will Demand Media Go Below $10?” He thinks the company is way overvalued compared to similar technology companies.
3. Demand Media Is Dependent on Current Search Engine Algorithms
There’s credible evidence that Google isn’t happy with how well content farms rank in Google’s search engine. A crucial component of Demand Media’s business model is making page one of Google searches. If the big G makes changes that pushes those articles off page one, DM’s revenues will take a big hit.
Demand Media stock would only interest me if the company can demonstrate that it can consistently make increasing amounts of money over the long term, and I’m skeptical of that.
I’m not giving you specific advice on when and how to buy or sell any stock or financial instrument. You need to do your own due diligence for all financial transactions, and that includes getting the advice of competent professionals. I have not engaged in any transactions involving Demand Media stock.
What’s your view on the value of Demand Media stock? What do you see for the future of the company?