Goldman Sachs has downgraded the stocks of two
Internet companies - IAC/InterActiveCorp(NASDAQ:IACI) and Demand Media
Inc(NYSE:DMD), which sent the shares of the companies plummeting on Tuesday.
Both the stocks were downgraded to Sell from Neutral
earlier. Goldman analyst, Heath P. Terry while downgrading the stocks said that
that the companies' search businesses was facing growing risks due to their
increasing reliance on paid traffic.
There is more competition in the segment while they
face the risk of further restrictions around their business models by Google,
the grand-daddy of search.
"In (the third quarter), AOL began a search
marketing campaign that directly competes, though on a much smaller scale, with
IAC's program of buying search ads that direct users to similar search result
pages on Ask.com," Terry said.
Demand Media also had similar model in the form of its
eHow brand that gives detailed information on all subjects.
Shares of Demand Media fell 60 cents, or 6.5 percent,
to $8.63 on Tuesday. The stock has traded in the 52-week range of $5.85 and
$12.50.
Shares of IAC fell $3.67, or 7.8 percent, to $43.50.
It has traded in the 52-week range of $39.24 and $55.57.
Both the companies follow the policy of paying Google
to drive traffic to their sites. Terry said that he would have more confidence
in the companies if the companies changed their model to draw traffic on their
own rather than rely on Google.
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