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.