Demand Media Inc. went public a little more than a year ago. And it’s been a rough ride.
The Internet publishing company’s stock fell from a high of about $24 to a low of around $5. That happened after Google Inc. made a change that pushed Demand’s articles off the top ranks of searches, lowering their visibility.
But the company’s stock is now trading at about $7. Most analysts who cover the company rate it a “buy.” The company is planning a $5 million investment. Revenue is up; when the Santa Monica company announced earnings last month, the stock soared 31 percent that day, although it then fell some thereafter.
Douglas Arthur at Evercore Partners in New York is one of the analysts who rates it a “buy.”
“We continue to believe that Demand Media has a uniquely efficient model for publishing in-demand content on the web and monetizing it,” wrote Arthur, who’s. not entirely optimistic. “The stock is not likely to escape its $6 to $7 price range any time soon.”
Demand’s main business is creating content for its three main websites: LiveStrong.com, a health site; male humor site Cracked.com; and do-it-yourself instruction site eHow.com.
The company makes money by selling advertising on the sites, and it commands premium prices because the sites have a good record of luring article readers to click on advertiser sites and buy products there.
It does that by finding out what many people are searching for on the Internet, then assigning and posting articles accordingly. For example, if they see people are looking for a specific brand of tire for SUVs, they would write an article about how to choose tires for SUV owners. The article contains key words to help it gain high ranking in search engine inquiries, the process known as search engine optimization or SEO. Once web surfers read the article, they’re prompted to purchase from a tire advertiser on the same page.
After Demand Media’s initial public offering in January 2011 at $17 a share, the stock’s price continued upwards to a high of $24.57 last March. Then Google announced changes in its search algorithm designed to screen out sites that provide short low-quality answers to common searches. As a result, Demand Media’s biggest site, eHow, sustained a 20 percent decline in search engine traffic.
The stock price reacted with a steady decline and has yet to return to its former trading range. Demand Media eventually deleted many of its lower-quality articles, resulting in a write-down of $5.9 million in 2011.
Rough year
Joanne Bradford, chief revenue officer at Demand Media, said the situation was a temporary setback.
“Google made a change, our traffic went down and now it’s back on a growth trend,” Bradford said. “It was a turbulent year in our market space, but we expect many similar changes in the future. Our goal is to get content in the right place for the right viewers.”
Bradford noted that according to Internet data tracker ComScore, the combined Demand Media sites attract an audience of more than 100 million every month. In January, the sites got 815 million page views, a 3 percent increase from January 2010.
For the most recent quarter, Demand Media’s revenue increased 15 percent to $84 million from a year earlier. For full-year 2011, it increased 28 percent to $325 million. The company lost $6.8 million in the quarter, compared with net income of $1 million the year earlier. (Most of the loss came from the $5.9 million write-down.)
Bradford said the company responded to the Google setback by developing new formats including long feature articles, sometimes accompanied by shorter related articles, top 10 lists and more videos.
Also, the company has introduced a program that lets advertisers show comments, photos and videos from their Facebook pages or Twitter streams in their display ads.
Alex Becker, founder of Internet marketing company Highly Relevant in Westwood, said Demand Media’s challenge is to remain high on search engine results as the engines continue to refine their methods to find high-quality content.
“These sites have content, but not experts,” he said. “They don’t have tax experts writing about taxes or doctors writing about medicines. Google has gotten better, so just because you’re good at SEO doesn’t mean you’ll be No. 1 in the rankings anymore.”
However, Becker believes in the company’s future.
“Their business model is more than sound, it’s phenomenal,” he said. “Like most Internet stocks, they were inflated up front and I think they will rebound.”
According to Bloomberg, eight of the 10 analysts who cover Demand Media rate it a “buy,” with the remaining two rating it “hold” or “neutral.” The consensus 12-month price target is $9.52, a 27 percent premium over its March 14 price of $7.49.
Name selling
In addition to its sites, Demand Media writers also produce articles that the company sells to about 400 other sites including LegalZoom.com in Glendale, USA Today and National Geographic. The company has commissioned or produced more than 100,000 YouTube videos, such as the eHow do-it-yourself tutorials on rose gardening. The videos produce ad revenue.
Demand Media also has a portfolio of 12 million Internet domain names for sale. But the biggest part of the company’s revenue, 63 percent, comes from the articles and videos. Domain sales represent the remaining 37 percent.
The company has set aside $5 million to buy domain names when a wave of new suffixes, such as dot-hotels, goes on the market.
Arthur at Evercore Partners believes the domain business will see an upswing this year as the Internet expands with up to 1,000 new suffixes beyond the .com and .net ones already common.
“We believe the stock significantly undervalues (Demand Media’s) domain name business, which continues to grow strongly,” Arthur said.
