The Bull Case for Demand Media–And Why Wall Street May Not Buy It
There’s no debate that changes Google has made to its search engine’s ranking formula have taken a toll on Demand Media.
How big a toll? That one’s up for debate: Richard Rosenblatt’s company says the changes, which affect the traffic that Demand’s sites get from Google, aren’t significant enough for the company to change its guidance.
Most of Wall Street disagrees, and has been hammering Demand shares for the last couple of weeks. DMD is now trading around $16.70, down from a peak of more than $27 earlier this year.
In a note published today, Stifel Nicolaus analyst Jordan Rohan argues that investors are overreacting (Stifel helped take Demand public in January), and keeps his “buy” rating intact. A worst-case scenario, he says, is that the Google changes will clip Demand revenues by 10 percent and EBITDA by 20 percent–but Wall Street has pummeled Demand much more than that.
Rohan (and many others) are very interested to see what Demand says on its May 5 earnings call:
EHow and Demand Media had a great deal of momentum all the way through the first quarter and into the second quarter. But there is now this new variable with which to contend–it is hard to forecast traffic if there is volatility in index rank. How does that all balance out? To the extent that is possible to broaden the range of possible outcomes for the year, without abandoning the guidance altogether, we believe that would be incrementally positive, at least compared to current levels of fear. Maintaining guidance for full year revenue and EBITDA would be even sweeter, if possible. The “what can be done” part of this is key, in our view–own up to the weaknesses, identify the steps required to address those weaknesses, and correct course. Quickly.
Which sounds great. The problem for Demand (and many other publishers, including the New York Times, which said that its About.com had been beaten up by algorithm changes, too) is that it’s entirely possible that Google isn’t done adjusting its search formulas.
And what if it’s just beginning to overhaul search?
If so, every Google-dependent publisher is going to have a very hard time responding to each and every change the search giant makes. Which means that Demand Media’s fortunes will be in flux for some time. And it will be very hard to make Wall Street feel good about that.