Which Social Media Website Is Interesting to Investors?

Demand Media DMD is an internet based company - much like Benzinga - that develops customized website content for its clients. While some people think that publicly traded websites are reaching a stock market bubble, especially the likes of Facebook and Groupon, others are excited to be a part of the future. It cannot be ignored that certain websites have been given outrageous valuations, but then again, there are certain websites that are valued appropriately and operate a business that can back it up. Is Demand Media one of these companies?

After all, Demand Media debuted on the stock market in late January 2011, and promptly began to decline. It started off around the $22-$24 price range, and is now currently trading between $8 and $9. Are there any obvious reasons why the stock suddenly fell off a cliff starting in April 2011? On the surface, it looks like Demand Media has been trying to grow aggressively. It has already announced two acquisitions this year - CoveritLive in March and IndieClick in August. It has also been able to beat earnings estimates and retain positive guidance estimates. Why could the stock have plummeted so badly?

Demand Media's revenue has remained fairly static. Over the last three quarters, the firm's revenues have only fluctuated from $74 million to $80 million. Costs of goods sold and operating expenses have also been fairly consistent. The one big change which may have irked investors occurred in Q1 2011. Sales, general, and administrative expenses jumped by $9 million to $27 million. This could mean that salaries were hiked up significantly or that office supplies and other necessities were increased. This may not have been the best move for the company, especially considering that the increased SG&A expense resulted in negative operating income numbers. Moreover, Demand Media paid $33 million in a preferred dividend to preferred shareholders in Q4 2010. This move was absolutely detrimental to the company's earnings, although the company was not public then. In fact, it could be speculated that Demand Media wanted one last, large payday before the company went public and all of their activities were transparent.

Ultimately, the company's diluted EPS numbers were negative throughout 2011, although the Non-GAAP EPS figures were positive. Despite the interesting income figures, Demand Media's cash position has been fairly positive, although volatile. Despite negative income numbers, Demand Media's operating cash flow was saved due to positive fluctuations in working capital. For example, stock based compensation, payables, accrued liabilities, and other working capital items contributed to positive cash flow in the last several quarters. Another interesting note to point out is that depreciation and amortization significantly boosted cash flow, which is probably a result of the intangible assets that the company has been accruing.

The company's capital expenditures range from property investments to intangible asset purchases. In the end, the company manages to spend at least $30 million each quarter in investments of this nature. Before Demand Media became public, it lost cash due to financing activities as a result of repaying debt each quarter. However, in each of the first two quarters of 2011, Demand Media gained $79 million due to equity issuances, which certainly bolstered its cash position. When looking at all inflows and outflows of cash, Demand Media finally became cash flow positive as a result of the equity issuances.

Demand Media's balance sheet has been growing organically as well. Its cash and other current assets have been increasing steadily over the quarters. However, Demand Media has been managing its receivables and inventories without stocking itself unnecessarily and preventing proper cash flow. Intangible assets have been increasing significantly, which may be a function of individual asset sales and acquisitions as well. Current liabilities have been managed well over the last few quarters. Payables have been consistent, accrued liabilities have decreased over the last few quarters, and deferred revenues have been consistent as well. Non-current liabilities have been very volatile, however - in Q2 and Q4 2010, long-term liabilities were $389 million, while it is typically $15 million. The primary reason for this stems from aberrant issuances of convertible securities. The company operates with various levels of debt, so investors will have to keep an eye out for Demand Media's ability to pay it off going into the future.

Lastly, retained earnings have been fairly stagnant, but have also been negative. This may not be what some investors are looking for, as retained earnings is a key indicator of value added to shareholders' portfolios.

Investors who are interested in internet based companies should consider Demand Media, or perhaps a private investment in Benzinga! Demand Media boasts an interesting business model that has steadily and tangibly garnered revenues over the last several quarters. Investors should do more research and really understand all aspects of the company before considering taking any positions in it.

Demand Media is currently trading at $7.35, down almost 68% for the year.