Demand Media Inc (NYSE:DMD) has a bright future, according to one analytics firm. Anonymous Analytics has previously published market-moving fraud and / or short reports on various companies in the past. This time, however, the firm has published a long thesis on Demand Media. The analytical firm shared an early copy of its thesis with ValueWalk.
Firm sees near-term catalysts for Demand Media
Anonymous Analytics believes Demand Media Inc (NYSE:DMD) is extremely undervalued because it’s about to “explode thanks to its long-term, multi-year investments. They highlighted the new ICANN (Internet Corporation for Assigned Names and Numbers) program, which partners Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN), and Demand Media.
The new ICANN program will introduce new extensions for domain names, thus opening up a space that had previously been monopolized by Verisign, Inc. (NASDAQ:VRSN). Now instead of being limited to extensions like .com, .org, and the like, domain purchases will be able to choose from a wider variety of extensions, like .attorney, .social, .democrat, and others.
The three near-term catalysts the firm sees for Demand Media Inc (NYSE:DMD) are the scheduled spin-off of the Registrar and Registry business (which will be known as Rightside Group), the expected buyout of the company’s Content division, and the expected initial public offering of the company’s GoDaddy segment. Based on these catalysts, Anonymous Analytics places a value of $10.36 per share on Demand Media, which represented an upside of 138% based on prices when the firm’s researchers wrote their report. The firm has a rating of Conviction Buy on Demand Media.
Examining the catalysts
[drizzle]Demand Media Inc (NYSE:DMD) filed a regulatory document stating its intention to spin off its Registrar and Registry business in January. The company expects to complete that spinoff by this summer, and Anonymous Analytics believe that this will “unlock tremendous value” while enabling Demand Media to focus more on its core Content & Media business. The new company will be called Rightside Group. The company also is expected to hold an IPO for its GoDaddy domain name registrar business. It is the world’s biggest registrar business, with Demand Media’s own Rightside Group trailing close behind.
The firm also expects to see significant margin expansion in the near term, as management has been investing heavily. The analysts believe Demand Media Inc (NYSE:DMD)’s earnings potential has been “understated and obscured” by all these investments, which will give way to growth in revenues and what they expect to be “dramatic” expansion in the company’s margins.
Demand Media Inc (NYSE:DMD) management stopped offering guidance to prepare for the Rightside spinoff. Anonymous Analytics said the company had to “make investments that didn’t fit into the quarter-to-quarter purview of sellside analysts.” The firm expects both Demand Media and Rightside to once again provide accurate guidance after the separation of the two companies.
In addition, the firm believes Demand Media Inc (NYSE:DMD) will go private after the spinoff because it has not named a permanent CEO in the wake of the departure of its previous long-standing CEO.
Changing how Demand Media is valued
Traditionally, analysts have generally valued Demand Media Inc (NYSE:DMD) based on its C&M division. At one point, that segment was thriving, as its domain names eHow, Livestrong.com and Cracked.com ruled the Internet. However, Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s search algorithm updates took a major chunk out of the company’s content in its attempts to downgrade listings for poor content. That forced Demand Media to find more stable revenue sources, so it pursued the domain registry business and overhauled the content offered on its websites.
The analysts at Anonymous Analytics believe that these changes will bring “massive returns” but that Wall Street has been overlooking the upside potential for Demand Media Inc (NYSE:DMD) because of the problems at its legacy C&M division. However, they noted that turnaround efforts at all three of the company’s content properties have worked. This demonstrates that management’s overhaul to adapt the company’s content to Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s major algorithm changes have been working gradually overtime.
Breaking down Demand Media Inc (NYSE:DMD) by segment, the firm estimates that its C&M division is worth about $4.32 per share on its own. That’s right around the current trading price, which also includes the Rightside division.
See full PDF here: Demand Media is ‘Deeply Undervalued’: Anonymous Analytics