AI has had a big impact on the stock market and industries like media, where it brings both challenges and opportunities. 

Ziff Davis (ZD) has embraced AI, using it to improve its platforms through investment in Xyla. 

Despite a low market valuation, the company has strong fundamentals, including steady revenue growth, disciplined capital management, and solid financial performance. 

While near-term challenges like advertising volatility remain, its focus on AI makes it well-positioned for future growth.

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Artificial intelligence (AI) was one of the stock market’s biggest influences this year.

In light of this, the future of companies is becoming increasingly tied to their ability to leverage AI.

For the media industry, the increased adoption of AI has had a mixed impact. While some businesses that worked with AI saw an increase in profits, others were concerned about its potential implications.

The primary assets of media organizations became at risk because AI tools can be used for free to obtain copyrighted data that media companies charge for.

Although some businesses argued that they needed to sue AI models for profiting off their property, not all of them went in this direction.

These media companies cooperated with AI firms because they recognized an opportunity rather than a danger.

Ziff Davis (ZD) is a great example of this proactive side in the media industry.

The company operates as a digital media and internet services company, managing a diverse portfolio of brands across technology, gaming, e-commerce, health, and cybersecurity.

It generates revenue through numerous ways such as content marketing, subscriptions, and advertising spaces.

Ziff Davis has embraced artificial intelligence as a tool to enhance its operations with its recent acquisition of a minority stake in Xyla, a firm specializing in generative AI.

Xyla’s AI has already been implemented on MedPageToday, a platform under the company’s Everyday Health division, showing early signs of success, including increased traffic from search engines like Google.

Additionally, Ziff Davis’s diversified revenue streams have been a key advantage. Revenues increased 3.7% YoY, mainly driven by advertising revenue increasing by 5.8% in the third quarter of 2027.

Subscription revenue grew by 1.8% in the same period, demonstrating the stability of recurring income.

Ziff Davis has also maintained disciplined capital management, a strength that sets it apart. Over the past few years, the company has reduced its leverage ratio significantly, from 1.9x in 2019 to 0.7x now.

All these factors combined enabled Ziff Davis to achieve a 29% Uniform return on assets ”ROA” and 10% asset growth.

Despite this strong performance, the market is pessimistic about the company due to competition in digital media and advertising volatility, reflected by its 9x Uniform P/E.

We can also see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform ROA will fall to around 15%, even lower than the pandemic levels.