Ziff Davis Pursues AI Integrations In Earnest (NASDAQ:ZD)

A Quick Take On Ziff Davis

Ziff Davis, Inc. (NASDAQ:ZD) provides media and software products and services worldwide.

I previously wrote about ZD with a Neutral Hold outlook.

Management is pursuing AI technology benefits across its properties.

Given the stock’s current apparently full valuation and continued slight topline revenue contraction, my outlook on Ziff Davis, Inc. in the near term is Neutral [Hold].

Ziff Davis Overview And Market

Ziff Davis operates a growing collection of digital media brands and various subscription software industry divisions.

The company is led by president and CEO Vivek Shah, who has previously held senior management positions in the media industry, including at Time Warner.

The firm’s main coverage areas include the following:

• Technology

• Connectivity

• Shopping

• Gaming & Entertainment

• Health

• Cybersecurity

• Martech.

The company acquires customers and viewers through online methods as well as through direct sales and marketing efforts at each of its brands.

ZD operates in a variety of media markets and security markets, some of which are unrelated to each other.

According to a 2022 market research report by Technavio, the worldwide market for digital media is estimated to increase in value by nearly $700 billion from 2022 to 2027.

This represents a forecast CAGR (Compound Annual Growth Rate) of 13.78% from 2022 to 2027.

The primary reasons for this expected growth are the ongoing transformation of media into digital form, broader and faster internet connectivity and greater consumption of all forms of digital media by consumers.

The graphic below summarizes the historical and projected future growth trajectory of the market through 2027:

The firm also operates in connectivity and cybersecurity software markets, which are substantial in their own right. However, its technology vertical has noticed the greatest amount of shrinkage over the past year, likely a result of the retrenchment in the greater technology industry.

Ziff Davis’ Recent Financial Trends

Total revenue by quarter has fallen year-over-year; Operating income by quarter has also dropped YoY:

Gross profit margin by quarter has dropped slightly in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter have varied materially more recently:

Earnings per share (Diluted) produced positive results in the most recent quarter and year-over-year:

(All data in the above charts is GAAP.)

In the past 12 months, ZD’s stock price has fallen 19.07% vs. that of the iShares Expanded Tech-Software Sector ETF’s (IGV) rise of 30.93%:

For balance sheet results, the firm ended the quarter with $714.9 million in cash, equivalents and short-term investments and $1.0 billion in total debt, none of which was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $191.5 million, during which capital expenditures were $107.5 million. The company paid $29.8 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.

Valuation And Other Metrics For Ziff Davis

Below is a table of relevant capitalization and valuation figures for the company:

Click to enlarge

(Source – Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, the firm’s shares would be valued at approximately $59.57 versus the current price of $60.6, indicating they are potentially currently fully valued.

Sentiment Analysis

The chart below shows the frequency of various keywords in management’s most recent earnings conference call:

The chart shows a significant frequency of negative keywords, indicating the firm is under pressure from macroeconomic uncertainties and challenging conditions.

Analysts questioned leadership about signs of recovery, its Xyla partnership and its capital allocation strategy.

Management responded that its reasons for recovery optimism include growth in connectivity, increasing pharma advertising, new Humble game releases and a flattening in its cyber security business.

With its partnership with Xyla, the company hopes to generate revenue through new physician tools as well as its view that AI technologies can increase content velocity, volume and completeness.

Management said its capital allocation strategy remains stable, although M&A deals are still a priority and are expected to increase from the current sluggish environment ‘once there is clarity on the broader economic environment.’

Commentary On Ziff Davis

In its last earnings call (Source – Seeking Alpha), covering Q2 2023’s results, management’s prepared remarks highlighted the company’s investment in Xyla, its new AI strategic partner.

Management believes that major search operators will continue to compensate rights owners with referred traffic, even as the search experience evolves with AI.

Non-search AI platforms ‘will also need to compensate right holders for their content’, and the company has recently joined the News/Media Alliance to ‘address the clear infringement of our copyrights.’

Stay tuned to this brewing battle over money.

Total revenue for Q2 2023 fell 3.4% year-over-year, while gross profit margin also dropped by 0.9%.

Selling and G&A expenses as a percentage of revenue increased by 1.2% YoY, and operating income fell by 15.2%.

The company’s financial position is reasonably strong, with ample liquidity, only long-term debt and strong free cash flow.

Looking ahead, full-year 2023 topline revenue is expected to contract by (0.8%) versus 2022.

In the past twelve months, the firm’s EV/EBITDA valuation multiple has dropped by approximately 24%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include improved content production at lower costs through its various AI initiatives.

However, these potential improvements will likely take time to disperse throughout the firm’s numerous brands and properties.

Another potential upside would be receiving compensation from non-search AI copyright users, although that will take time as well.

Given the stock’s current apparently full valuation and continued slight topline revenue contraction, my outlook on Ziff Davis, Inc. in the near term is Neutral [Hold].