Investor Essentials Daily

Ziff Davis helps companies spend the right half of their marketing

March 22, 2022

No one is quite sure who said the famous marketing quote “Half my advertising spend is wasted; the trouble is, I don’t know which half!” Whoever said it though can rest easy they hit on a key problem in marketing.

For marketers, it’s a difficult proposition to target advertising to those who will be influenced by it. However, this company is able to cultivate small niches with its publications which make it a great platform for relevant advertising.

Its power to get companies marketing dollars to work is the reason why it showed up on our FA Alpha 50 screen.

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As Google (GOOGL), Facebook (FB), and any ad agency will tell you, the most important thing nowadays for advertising is eyeballs, or who is looking at an ad. If a company can tap into an existing fanbase to sell a similar product, then each advertising dollar per view is going further.

This strategy works for massive markets, like selling sports tickets and paraphernalia to a large fanbase, but it’s also just as effective for niches like expecting parents, tech geeks, or gamers.

No matter the size of the niche, there are products and companies that want exposure to it. If a company can help advertisers and companies get access to relevant customers, they are going to win.

That is what Ziff Davis (ZD) has been showing for years, long before it rebranded from J2 to Ziff Davis, after it spun off its office connectivity offerings to focus solely on its media franchises.

Ziff Davis has a number of dominant brands across different sectors. This includes Mashable for early tech adopters, for deal hunters, IGN for gamers, and BabyCenter for expecting parents. Through these web platforms, advertisers are able to create targeted ads to these interest groups that are relevant.

But looking at as-reported metrics, one wouldn’t think Ziff Davis’ franchises are valuable, as the company hasn’t been able to produce high returns for many years.

For the past four years, Ziff Davis’ return on assets (“ROA”) has been below 8% and declining.

As-reported metrics lead us to believe that Ziff Davis is struggling. It appears it’s performing below corporate averages and only getting worse as time goes on.

However, Uniform Accounting tells us a different story.

In reality, Uniform metrics show us Ziff Davis actually saw robust profitability and has generated impressive returns.

In 2021, Uniform ROA was 70% and has hovered around those levels for the past four years.

With the growing demand for dominant destination sites and a successful M&A strategy to add new dominant franchises to its stable, Ziff Davis is able to compound these high returns with a 24% growth in assets last year.

Yet the market seems to miss all this, as Ziff Davis is trading at a meager 12x Uniform P/E. This combination of impressively resilient and strong returns, high growth, and low Uniform P/E points to significant upside potential going forward, hence why it’s a great FA Alpha 50 name.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

If you’re interested in seeing the other 49 names on this month’s FA Alpha, click here to learn more.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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