Faustus Posted June 2, 2014 Share Posted June 2, 2014 Anonymous--the hacker group--put together a curiously compelling presentation on this company. You can find a brief writeup here: http://qz.com/213820/anonymous-first-stock-tip-buy-the-internet-company-wall-street-hates/ I read through the presentation, and the thesis goes something like this: 1) Demand will be spinning off a domain name registration business that is worth more than Demand's current share price. In the next couple of years a new batch of web addresses will be released: .doctor, .lawyer, .movie, etc. Rightside, Demand's registration segment, is buying up a lot of these addresses, and stands to benefit from the unraveling of the .com monopoly. 2) Traffic on the content farming business--which draws analysts attention and ratings--has already bottomed out. Ehow and Livestrong have worked to boost quality and move up google's algorithms. Collegehumor and Cracked continue to be popular and draw page views with popular content. By the presentation's formulations, an investor ends up getting $8-$12 of value from a $4 and change stock. The Anonymous presentation left out Demand's acquisition of Society6--an online marketplace for independent artists and designers. Anyone familiar with this business? Link to comment Share on other sites More sharing options...
KCLarkin Posted June 2, 2014 Share Posted June 2, 2014 Not familiar with the stock but it does seem like a promising rock to look under. $400M market cap certainly seems plausible. Michael Price has a token holding. Link to comment Share on other sites More sharing options...
constructive Posted June 2, 2014 Share Posted June 2, 2014 Seems to me that betting on these new top level domains is very risky and the value is unknown. .com is vastly more popular than .co, .net, etc because of mindshare/demand, not because of supply. They are also really bad at their core business, content farming. Writing inane "listicles". Which isn't a great business model even for the companies that are good at it. Link to comment Share on other sites More sharing options...
Faustus Posted June 2, 2014 Author Share Posted June 2, 2014 Seems to me that betting on these new top level domains is very risky and the value is unknown. .com is vastly more popular than .co, .net, etc because of mindshare/demand, not because of supply. They are also really bad at their core business, content farming. Writing inane "listicles". Which isn't a great business model even for the companies that are good at it. I'm curious to see how the domain thing plays out. In the early days of the internet, when you didn't know what the hell you were clicking on, .com inspired confidence--".net," ".co," ".tv" suffer from stigmas attached many years ago. Today, content is the driver. People will click on anything that content sharers have deemed worthy (just look at how links appear on twitter). I think new domains like '.finance' and '.sports' hold more potential than those that have surfaced in the past. Also, Demand was once good at content farming. Google changed the algorithms to displace ehow and sites like it. Demand hasn't said they're backing down from this businss, instead they're looking to improve it by producing real content. You're right though: it's not a very stirring business; if content farming was the company's sole aim, I wouldn't be sniffing around at all. Link to comment Share on other sites More sharing options...
libor.plus1 Posted June 11, 2014 Share Posted June 11, 2014 DMD is a company that has both a content business and a registrar business. Both of these segments contribute equally to revenue. DMD is planning to spin off its registrar business from its content business in the next few months. Im guessing that both companies will have a 200M market cap individually (currently the company is valued at about 400M) I did some research on this company after a write-up from GeoInvesting which is a solid research firm that is usually in the fraud busting business. Here is their write-up on the Content business: http://seekingalpha.com/article/2249683-demand-medias-c-and-m-business-prospects-boosted-by-new-google-search-algorithm-changes The turnaround in the content business is interesting, but what I find most compelling is the registrar business which will begin trading under the ticker NAME post spinoff. Currently the registrar side manages 15.4 million domain names. GoDaddy which just filed their paperwork to go public manages 57 million. I dont know what GoDaddy will be worth when it begins trading, but considering that KKR and Silver Lake bought GoDaddy for around $2.3 billion back in 2011, a $3 billion valuation seems pretty reasonable. From some quick math, we can see that GoDaddy is valued at around $53 per domain under management which would make DMD's registrar business worth around $800 million on its own. DMD has also been investing in its registry business (not to be confused with a registrar business) which I expect will lead to higher margins per domain under management. A good example of a registry business is Verisign with net margins of around 56%. A good comparable in this case would be Minds + Machines on on the London stock exchange (MMX). MMX is a blended registrar and registry business with a fraction of the assets that DMD has. In 2012, MMX made around $700K in revenue but has a market value of about $180 million. I am kind of dumb founded as to why DMD is trading so low although it has started to runup since the last earnings report. Any opposing viewpoints or thoughts in general would be appreciated. Disclosure: I started building a position in DMD ahead of the spinoff. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted June 11, 2014 Share Posted June 11, 2014 1- I'm not sure that $/domain is a good metric for valuing eNom, Demand's domain registrar side. A domain registrar needs the following components: A- A technology platform. A good platform will have features like domain privacy, bulk editing of domain names, etc. etc. B- Ability to attract customers. C- Ability to provide technical support well and at low cost. (D- Ability to cross-sell customers on other services such as email and web hosting and to upsell them on domain privacy and dynamic DNS.) I believe eNom simply provides A. Enom lets its resellers (e.g. Namecheap) handle B and C. GoDaddy on the other hand does all three. It seems to be really, really good at B. They didn't spend a lot of money on their banned Superbowl ad but generated a lot of buzz over it. On the other hand, not many people have heard of NameCheap (which is the domain registrar I like the best) or other eNom resellers. 2- Of course you have to factor in growth in the domain registrar business. I'm guessing that the domain registrar business will be dominated by the #1 and #2 players who will make most of the money. It looks like GoDaddy will be #1, followed by eNom and its resellers. 3- To some degree the technology platform is a commodity. For example, many web hosts will resell the domain registration to their clients. The web hosting companies generally want to sell domain registration to their clients because it makes it difficult for their web hosting clients to leave. They will also provide deeply discounted domain registration for this reason. Because the web hosting companies control that order flow, they simply shop around for the lowest price for the technology platform. There's not too much value added by the technology platform so I don't think eNom will generate high revenue/domain on that business. Link to comment Share on other sites More sharing options...
xtreeq Posted June 11, 2014 Share Posted June 11, 2014 Haven't read it yet, but here's a writeup from two week ago http://www.anonanalytics.com/2014/05/demand-media.html Link to comment Share on other sites More sharing options...
libor.plus1 Posted June 11, 2014 Share Posted June 11, 2014 ItsAValueTrap: I think pretty much everything you stated is easily provided by all registrars. When you sign up for a domain on any platform (not just eNom), you get technical support, and you get email and web hosting as well as domain privacy. These are all very standard offerings provided by ALL registrars and not something unique to GoDaddy. DMD's SEC filings say as much. Also I think it's important to note that the DMD registrar side also owns name.com which is a retail business in addition to eNom. Regarding your last point I note that GoDaddy makes about $10 revenue per domain under management which is consistent with DMD. Link to comment Share on other sites More sharing options...
Mephistopheles Posted June 11, 2014 Share Posted June 11, 2014 Somebody already started a thread on this: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/dmd-demand-media/msg174570/#msg174570 Link to comment Share on other sites More sharing options...
libor.plus1 Posted June 12, 2014 Share Posted June 12, 2014 Ah. Glad to know I'm not the only one that caught an interest and hopefully we can merge the threads. The presentation that xtreeq pointed out does a better job than me of explaining the value in the registrar business. ValueTrap, would love to get your thoughts on it. I have also been noticing that both DMD and TCX have been rising nicely since the GoDaddy ipo was announced. Link to comment Share on other sites More sharing options...
PatientCheetah Posted June 12, 2014 Share Posted June 12, 2014 Everyone would want Rightside. Maybe we can get some irrational selling of the legacy DMD post spinoff. Link to comment Share on other sites More sharing options...
libor.plus1 Posted June 13, 2014 Share Posted June 13, 2014 Everyone would want Rightside. Maybe we can get some irrational selling of the legacy DMD post spinoff. On Rightside: I think there is a lot of value here you are correct on it being a desirable target. One likely acquirer is web.com (WWWW). -They already have a joint venture with Rightside called Namejet, which is an aftermarket seller of domain names. -In Q1 2014, WWWW also purchased an online auction service for domain names and noted that it compliments their JV with Rightside. -On the Q1 2013 conference call, WWWW management notes their interest in the .web gTLD and DMD's role: Analyst: My second question would be, in terms of the GTLD's, David, obviously .web is probably going to Demand Media. That's the most highly anticipated name in extension that's out there on the new GTLD program. It's going to be contested. It's going to go into auction at some point. What is your threshold? Would you be willing to go in and fight for that to be the registry for that name or would you rather just reap the benefits of being the registrar? Management: On .web, the way we've always thought about .web is that, given that we have a trademark on the name Web.com, we really needed to apply for .web in order to protect our trademark. We're not in the registry business today. We're a registrar and we're a big one and it's a profitable business. That's the business we like to be in. But, in order to protect our trademark, globally, we needed to basically defend ourselves by applying for .web. We're certainly interested in getting it but it's not our core business. Given the high degree of interest, we'll have to see how it plays out. But, we'll be perfectly content if anyone gets .web because they are going to distribute it through us and it's our name and we're advertising and building a brand in the marketplace and we're going to be a great deliverer of .web extensions, whoever gets it; whether it's us or someone else. I've also commented before that our strategy has always been to cooperate so we've looked at the people who have applied and we certainly are talking to all of them about who would benefit from this and which team would be the best team to provide services. That would be our strategy. On the DMD side: I think the consensus is that the DMD content properties will be acquired by private equity firms who already have a 40% interest in the company as is. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted June 13, 2014 Share Posted June 13, 2014 ItsAValueTrap: I think pretty much everything you stated is easily provided by all registrars. When you sign up for a domain on any platform (not just eNom), you get technical support, and you get email and web hosting as well as domain privacy. These are all very standard offerings provided by ALL registrars and not something unique to GoDaddy. DMD's SEC filings say as much. Also I think it's important to note that the DMD registrar side also owns name.com which is a retail business in addition to eNom. Regarding your last point I note that GoDaddy makes about $10 revenue per domain under management which is consistent with DMD. Let me clarify how it works. 1- Suppose you buy web hosting from some random web hosting company that is an eNom reseller. The customer might pay $60 for the web hosting plus "$5" for the domain registration. (The web host provides discounted domain registration because it makes it slightly harder from their customers to leave.) Now suppose you wanted to switch web hosts. You will need to contact your current web host to: A- Unlock your domain. B- Get the "EPP" code. It's the web host that handles the support in this case- NOT eNom. Depending on the web host, it could be that some employee at the web host has to manually go into their system to do A and B. This was my experience with DreamHost, one of the largest web hosts around. I could not do A and B through a web-based interface. A human being on the other side needed to do it for me. 2- Whenever I've bought domains through namecheap.com (a eNom reseller), I could do A and B through their web-based interface. 3- What I'm trying to say is this: When a domain name is under a reseller relationship, the reseller and eNom will split the works and they will split the profits. The reseller put in the work of attracting customers, providing technical support, etc. eNom provides the technology platform. GoDaddy largely does not resell domain names. They can potentially earn more money per domain name than whatever eNom makes on its reselling side. 4- One very minor factor to consider is that some domain registrars are kind of in "run-off" mode. They charge significantly more than namecheap/GoDaddy. However, many of their customers won't switch out of laziness (or because they don't know that they can shop around, or because it's barely worth their time). Network Solutions (owned by WWWW?) is like this. Network Solutions currently charges $18-$35/year for 10 years or less. Namecheap/GoDaddy are in the <$12 range. It's a big price difference. Network Solutions has a lot of legacy customers who pay "too much" for their domain registration and haven't bothered to switch to a cheaper, better registrar. (My experience with Network Solutions several years ago was that you could gain control of a domain by talking to them on the phone even though you weren't the actual owner. I was handling some web design work on behalf of the actual owner of the domain.) Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted June 13, 2014 Share Posted June 13, 2014 So I skimmed Rightside's financial statements. They aren't profitable??? That's weird and my kneejerk reaction to that is that management is bad. How do you not make money as the #2 player in domain registration? Link to comment Share on other sites More sharing options...
libor.plus1 Posted June 13, 2014 Share Posted June 13, 2014 Check out page 79: http://www.sec.gov/Archives/edgar/data/1589094/000104746914005450/a2220303zex-99_1.htm#mu10201_selected_historical_combined_financial_data You will notice that they were quite profitable until 2012. In 2012 they started investing in their registry business which forced them into loss-making. All those investments are only starting to generate revenue in 2014 (starting in February to be exact). Their loss-making is not something that I am concerned about as it was investment/growth induced. However, if you check out GoDaddy's prospectus, you will note that they are actually not profitable despite being the BIGGEST registrar in the world at about 5x bigger than rightside). The issue for GoDaddy is one of loss-leading to grow market share. After all, Superbowl commercials are expensive. Both GoDaddy and Rightside are loss-making, but for very different reasons. That's why I think Rightside is quite an attractive investment. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted June 13, 2014 Share Posted June 13, 2014 Hmm both the #1 and #2 players in this industry are losing money?! I had no idea. This looks like a pretty bad industry. Normally the #1 and #2 player in any industry makes a lot more money than everybody else. If they aren't making money, then the economics seem terrible. Market share: This is mostly a fixed pie that these companies are fighting over. Every domain has to go through a domain registrar. There is a small amount of discretionary market share. Some people will register domains to camp on the name or to game search engines for SEO purposes. If the costs for wholesale domain registration (this business will likely go to eNom) come down, then this activity may increase. This is somewhat of a separate market than the retail domain registration that goes to Godaddy and eNom+its resellers. The wholesale rate is lower. On the retail side, it is unlikely that lower prices will increase the size of the market. Overall, the cost of web hosting is much greater than the domain registration. Even if you go with really cheap web hosting and pay $24/year, saving a dollar on the domain registration is not a big deal. (Technically you may be able to get web hosting cheaper but I think most people pay more than $24/year.) There are a few people out there who get a domain name just for email. But if you factor in the time needed to set any of this up, saving a dollar doesn't lower the overall costs by much. Link to comment Share on other sites More sharing options...
libor.plus1 Posted June 14, 2014 Share Posted June 14, 2014 See, that's what I always thought. I just assume that the big money came from web hosting. It turns out that web hosting and other services are only about 30% of revenue, whereas most goes to domain name registration. I am talking about the industry in general and not just about GoDaddy and Rightside. I think maybe that has something to do with domain redirects, domainers and speculators, etc. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted June 14, 2014 Share Posted June 14, 2014 Libor, what are you talking about??? Link to comment Share on other sites More sharing options...
timidbid Posted August 3, 2014 Share Posted August 3, 2014 Glenn Chan's thoughts: http://glennchan.wordpress.com/2014/07/29/notes-on-demand-media-and-rightside/ Link to comment Share on other sites More sharing options...
Sunrider Posted August 3, 2014 Share Posted August 3, 2014 buysidenotes.com also recently had a write-up ... with a bit more of a positive conclusion (I believe saying NAME is worth about 250m as is, just based on the existing domains under management (plus some cash). C. Glenn Chan's thoughts: http://glennchan.wordpress.com/2014/07/29/notes-on-demand-media-and-rightside/ Link to comment Share on other sites More sharing options...
Saidal Posted August 3, 2014 Share Posted August 3, 2014 DMD combined was somewhat cheap earlier in the year at a fairly large discount to BV and at a double digit FCF yield. Yet, management quality is terrible (focused on the wrong metrics) and a material portion of EBITDA/FCF consisted of stock-based comp, a real expense if you are an equity holder..... I guess in this type of market if you need something sizable, buying ten ideas like this might work. Every spin has been super-crowded this year. Link to comment Share on other sites More sharing options...
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