One of the most common refrains you hear among wealthy investors is that you don’t invest in companies, you invest in people. People are just as responsible for the success of a company as their product is, the logic goes. Perhaps that’s why Demand Media has pissed off the Wall Street Journal.
In Demand’s recent IPO filing, the venerable investment paper “eagerly pored through the 187-page filing.” Their findings? Demand hasn’t been profitable since its inception.
“Like most loss-making companies, it included this note in its risk factors: ‘We have a history of operating losses and may not be able to operate profitably or sustain positive cash flow in future periods,’” the Journal notes in a story titled “Where Did Demand Media’s Profits Go?”
Demand is ruffling feathers thanks to co-founder Richard Rosenblatt’s boasts over the years that the company’s quite profitable, and his insistence that the company has always been profitable. Still, Demand Media maintains they are profitable on an Ebitda basis.
Is that enough to make for a powerful IPO for Demand? Who knows? The company operates in a brave new world: Internet content farming. They pay writers to churn out obscure, keyword-rich articles that advertisers like, and they buy domain names to fill with ads or to channel traffic to their flagship sites like ehow.com (a practice known as domaining in the industry).
It’s a hard industry to forecast for, but it’s hard to deny that there’s something sexy and intangible about Demand Media. Techies know and understand Demand Media, and they’ll probably be the ones day trading the stock while their bosses are out grabbing lattes. It reminds of Tesla’s IPO (NASDAQ:TSLA) in June. TSLA more than doubled in two days, before tanking out, then regaining steam to settle on an average trading volume of roughly 650,000; that’s a far cry from the 18 million shares that traded hands on the stock’s opening day.
It might be a fun play in its opening days, but a long-term investment in Demand Media seems riskier than Tesla. If Google suddenly starts penalizing the site’s products in its search engine rankings, Demand’s ad revenue could evaporate. They’re going to have to find more than one way to make cash before they make me a believer. Just don’t take that I mean I won’t buy shares in Demand Media at one point or another. I just won’t hold them for long.
Tags: Demand Media, TSLA
