Santa Monica based Demand Media (NYSE: DMD) completed the first “tech” IPO of the year this week, and perhaps the first IPO of the impending Facebook bubble. Demand Media owns web properties including eHow.com, Trails.com, and LIVESTRONG.COM that draw over 100 million monthly visitors to the 3 million articles and 200,000 videos that their network of over 13,000 freelance writers has produced.
They make money on the “Content & Media” side of their business by selling advertising and renting their underlying platform to other web sites. The company also owns the world’s largest domain registrar next to GoDaddy.com with over 10 million domains under management. Those numbers tell a great story and along with $179M in revenue over the first 9 months of 2010 they have a multi-year track record of double-digit revenue growth according to their prospectus. They lose money though – about $6M in the first nine months of 2010 and $20M in 2009.
Demand Media targeted the offering at $14-16/share, came out on 1/26 a buck higher than the top of the range at $17/share and shot up to $23.85 shortly after the open. The stock ended the second trading day at $21.85/share giving the company a valuation of approximately $2B, or about 8-9 times revenue. Quite a high valuation and according to Kevin Berk a sign that “The Bubble Is Back”
The company is somewhat unique, and you could make a case that since it is a non-traditional company some other measure of its cash generating capability should be used as a basis to measure the true value of the company other than a multiple of annual Net Income. In their prospectus Demand Media explains that it uses adjusted operating income before depreciation and amortization expense to manage its business since;
“the exclusion of certain expenses in calculating Adjusted OIBDA can provide a useful measure for period to period comparisons of our business’ underlying recurring revenue and operating costs which is focused more closely on the current costs necessary to utilize previously acquired long-lived assets. In addition, we believe that it can be useful to exclude certain non-cash charges because the amount of such expenses is the result of long-term investment decisions in previous periods rather than day-to-day operating decisions. For example, due to the long-lived nature of our media content, revenue generated from our content assets in a given period bears little relationship to the amount of our investment in content in that same period. Accordingly, we believe that content acquisition costs represent a discretionary long-term capital investment decision undertaken by management at a point in time. This investment decision is clearly distinguishable from other ongoing business activities, and its discretionary nature and long-term impact differentiate it from specific period transactions, decisions regarding day-to-day operations, and activities that would have immediate performance consequences if materially changed, deferred or terminated.”
Demand Media reports Adjusted OIBDA of $42M for the nine months ended September 30th. The value of the company to an outside acquirer would likely be based on OIBDA since that would be the most accurate picture of ongoing cash flow a potential suitor could expect to generate by acquiring them. Assuming they finished the year at about $55M in adjusted OIBDA they are valued currently at 36 times annual OIBDA which stretches rationality.
The company marketed their valuation prior to the IPO in the $1.2B range, so they certainly had more reasonable views on their valuation, but apparently the market is on the fast track to irrational exuberance about tech stocks. Again.
Next up in the line of harbingers: LinkedIn just announced plans for an IPO.