Why Demand Media (DMD) Is Falling Today

NEW YORK (TheStreet) -- Demand Media (DMD) was falling 7.9% to $5.11 after the company warned that changes to Google (GOOG) Search will continue to cause revenue declines.

Recent changes made to Google's Search algorithm to surface higher quality search results have hurt traffic to Demand Media's flagship Web site eHow. The company relies on advertisements on its Web sites for revenue, and largely relies on search traffic to bring people to its Web sites.

Demand Media's fourth-quarter revenue fell 6% from the year-ago period to $96.7 million. The company reported revenue of 3 cents a share for the quarter, down from 12 cents a share in the year-ago period.

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TheStreet Ratings team rates DEMAND MEDIA INC as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate DEMAND MEDIA INC (DMD) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, weak operating cash flow and generally disappointing historical performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Internet Software & Services industry. The net income has significantly decreased by 428.8% when compared to the same quarter one year ago, falling from $3.18 million to -$10.44 million.
  • Net operating cash flow has decreased to $18.81 million or 23.50% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 32.38%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 400.00% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Internet Software & Services industry and the overall market, DEMAND MEDIA INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • 48.60% is the gross profit margin for DEMAND MEDIA INC which we consider to be strong. Regardless of DMD's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, DMD's net profit margin of -10.84% significantly underperformed when compared to the industry average.
  • You can view the full analysis from the report here: DMD Ratings Report

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