Investment bank Stifel Nicolaus began its coverage of Demand Media with a buy rating and a price target of $28.That’s a nice vote of confidence from Wall Street for a company that just went public and is generating lots of controversy around its business model and accounting practices.
Meanwhile Goldman Sachs and Jefferies both have a Hold/Neutral rating. Jefferies in particular likes Demand Media but is cautious given its huge post-IPO pop.
For the bull’s case, here’s what Stifel Nicolaus thinks (rephrased and translated from banker-ese):
- Demand Media is better than anyone else at producing content people want to read, cheaply and in volume.
- Demand makes evergreen content that’s cheaper to produce and makes more money over time than other digital content providers (read: blogs).
- Sure, Demand is dependent on Google now, but they’ve been very good at SEO so far. The report points out that Google’s latest search tweaks hammered Demand’s competitors more than them. And getting more traffic from Twitter and Facebook means lots of potential growth.
- They can grow revenue by having more brand advertising. Right now most of Demand’s advertising revenue comes from Google’s AdSense, which is cheap. But they’ve hired away Yahoo’s Joanne Bradford to sell Demand’s premium site to brand advertisers, who are going to pay more. Demand does have a few premium sites like Cracked and Livestrong that are doing very well and could get lots of ad revenue.
- This is a “greenfield opportunity” where Demand has “economies of scale”, meaning it’s a big empty market where they’re the biggest and being big means you get bigger.
Stifel Nicolaus projects that Demand will generate revenue of $507 million and make a $55 million profit in 2013. Overall this is a good start on the Street for a company that’s not afraid of generating controversy and has lots of critics.