Traditional media stocks, especially the ones operating in print media, seem to have lost their allure for common investors. Newspaper stocks have long been out of flavor and except for Warren Buffett; no one is interested in buying them. Buffett, being Buffett, affords to see value in places where it does not exist, and manages to get it acknowledged too. However, not everyone can afford the luxury of going so much against the current. Similar is the case with magazine publishers, where industry wide consolidation is long due, but players are not able to muster strength to buy their competitors. Meredith Corporation’s (NYSE: MDP) botched attempt to buy Time Warner’s (NYSE: TWX) magazine portfolio is a case in point.
In sharp contrast to the gloomy situation in traditional media, digital media is flush with growing numbers of readers who are busy changing their reading habits to better realign with busy schedules and growing influence of Internet capable handheld devices. Demand Media (NYSE: DMD) is a classic example of this shift and how it has benefited from the changed dynamics. The company has its business model almost completely weaved around the Internet. Despite all the criticism labeling the company as a content farm, Demand Media has been able to almost double its annual revenues from $198 million in 2009 to $380 million in 2012. This year has been nothing short of a milestone for the company as it silenced long standing criticism regarding lack of profitability.
Growing demand of digital content is also driving a shift in bulk of traditional advertising to online publishers. This shift has been a boon for companies like QuinStreet Inc. (NASDAQ: QNST), which derive disproportionately high ratio of revenues from the Internet. QuinStreet has been able to maintain a steady top line, but its real challenge lies in controlling costs, which spiraled substantially in the latest quarter on onetime expenses. QuinStreet missed on revenues and margins in the latest quarter and the stock has lost substantially after issuing a conservative guidance for the current quarter. The lead generation market share is still very much fragmented and QuinStreet’s unique position could see it taking lead in consolidating the industry. The stock is trading less than its book value of $6.40 and looks extremely attractive now.
As they say, no one is immune to the forces shaping the industry, and so is the case with digital media outlets some of which are victims of their own success. Still, there are more opportunities on the long side in this emerging space than in the traditional media. However, investors need to keep constant vigil on latest financial performances as it does not take long for these companies to scuttle from their original path.