A few days after the initial public offering of content farm Demand Media, a post at Virtualeconomics adds another layer of skepticism to what’s already a pretty dicey investment proposition. The way the eHow.com operator recognizes its costs has already prompted many a raised eyebrow, but now it appears that the company has an unusual way of recognizing its top line as well.
[F]rom the wording of the IPO filing it appears that Demand Media is recognising (non-performance) ad revenues not as the ads are served and billed but on receipt of a “persuasive” contract from an advertiser with a decent credit rating. If so this is an unusual approach when compared to other ad-funded media businesses and could expose the company, and its investors, to various risks – if for example ad revenues that have been recognised in this way are not in the event collected. It could also expose the company to apparent but ultimately unrepresentative fluctuations in revenues, for example in reporting periods during which large, long-term contracts are signed by advertisers.
Not only does Demand hash out its costs of production over a five-year period — something no other publishing company does — but it also recognizes revenue that may ultimately not be there.
Virtualeconomics’ savaging of Demand doesn’t stop there:
At $25 a share Demand was worth north of $2bn – more than the New York Times. At a more realistic valuation of $10 a share that market cap looks more like $800m, and at $5 a share around $400m – the same scale as a minor UK newspaper publisher such as Trinity Mirror, or a niche US online publisher like The Knot. For a five-year-old online publisher which has yet to achieve profitability and faces serious risks to its core businesses that would be no mean feat at all. But $2bn simply isn’t credible, and if the Demand Media IPO tells us anything it’s that in the run-up to Facebook’s flotation we are facing a new internet bubble – and your best bet is once again not to be holding the shares when it bursts.
Between this news, some bearish action surrounding Facebook shares and questioning of the long-term stability of SecondMarket, we sure do seem to be in for a gloomy day.
mtaylor [at] observer.com | @mbrookstaylor