Many people believe that penny stocks are those that trade below $1. That is not the official definition. The threshold is widely defined as below $5. BuzzFeed’s stock recently closed at $1.66, down from a year’s high of $14.77.
If the upcoming recession is like those in years past, media companies will be particularly hard hit by falling ad demand. In the most recently reported quarter, BuzzFeed’s revenue was $92 million. Of that, $49 million was adverting. If history is any indication, the pace at which that figure has grown will drop off, and the figure may even fall year over year.
The most obvious problem BuzzFeed faces is that, in a declining market, companies that lose money usually take an above-average beating. BuzzFeed lost $45 million in the most recently reported quarter. In the quarter a year ago, the comparable number was $11 million. This is old news, but it does show BuzzFeed faces a struggle if ad demand slackens in a difficult economy.
There is an argument to be made that the 50% or so drop in BuzzFeed’s stock over the past month is part of a much wider reaction in the market. As the market collapses overall, some promising companies are pulled down, even if they do not deserve to be part of the sell-off.
As a recession starts, management has a chance to prove it can keep revenue rising at a brisk pace. Otherwise, recovery in the share price will be extremely difficult.