eHow has put Demand Media (DMD) on the map. Regardless of what you think about the site, it's tough to doubt the genius of it all. If you want to figure out "How to" do something, naturally, you'll search using those two words. Investors make a big mistake, however, if they typecast Demand Media as being all about eHow. It's not.
Demand Media owns and operates several other sites, including Livestrong.com, Cracked.com, and Trails.com. If you really want to understand what Demand Media is all about, look beyond its owned and operated entities. These sites will continue to evolve.
As somebody who freelances and does contract work for the company, I can tell you for a fact, executives and in-house staffers are focused on improving the quality of the content DMD freelancers produce. This includes cutting freelancers and editors who simply can't get the job done. The company ranks its freelance employees, giving higher-paying assignments, special opportunities, and contract work only to those who perform at a high level. I believe those who don't will eventually fall by the wayside.
Putting quality control and eHow aside, DMD's sweet spot going forward -- and biggest opportunity -- centers on the content it provides to other companies. Here are just a few examples of content powered by Demand Media.
These three examples represent a small segment of the sites DMD provides content for. Growth in this area could prove crucial for DMD stock going forward. As it stands, pursuant to DMD's first earnings report as a public company, this part of the business makes up 17% of the company's revenue. That's compared to 44% for its O&O sites and 39% for its registrar business. While the share of the revenue O&O sites accounted for grew by 7% year-over-year, the 17% number for DMD's network for consumer sites was stagnant. In terms of actual numbers, revenue generated by DMD's network of consumer sites grew by about 18% year-over-year, while revenue from O&O sites climbed nearly 34%. The report also notes that page views increased 31% and 20% for DMD's network of consumer sites and O&O sites, respectively.
Clearly, DMD can experience significant upside by expanding its network of consumer sites. It has considerable work to do in this area. As these sites grow in number, the company's expanding direct sales team should have an easier time generating revenue via advertising sales and marketing arrangements. Like other large media entities, DMD can offer advertisers exposure to a variety of audiences via a combination of its own properties and its network of consumer sites. Growing revenue and its reach in the latter area can help cement DMD as the (hipper) Associated Press of the 21st Century. I am sure DMD would like to make its powered by Demand Media tagline as ubiquitous as an AP byline.
How to Play It
Google's (GOOG) algorithmic tweak has yet to impact eHow. Overall, I do not believe DMD relies on GOOG as much as the voices that scream louder would have you believe. As evidence, I submit that Demand's stock price has not necessarily tanked with the Google news. In fact, it did not really retreat from the general pattern it has shown since its IPO. Up one day, down the next, but with a nice pop since the IPO.
I think investors and analysts, whom DMD executives will speak to in the coming days and weeks, remain in neutral regarding DMD shares. The next earnings call or two should be big. I will be listening for growth in all aspects of the business, with particular focus on DMD's network of consumer sites and direct sales efforts. In the meantime, I think the stock trades range bound.
DMD starting trading options last Friday. If you choose to hop in, options might provide the perfect opportunity, assuming you expect the stock to hold tight between $20 and $25. I would consider selling the DMD $20 puts with either March or April expirations. On Tuesday, you could have sold the March $20 puts for about $0.55 each and the April $20 puts for $1.20 apiece.
You could get a bit more aggressive and sell the March or April $22.50 puts for $1.20 or $2.30 respectively, as of Tuesday. However you play it, you should at least have enough conviction in the company that you would not mind owning the shares at $20 or $22.50. You would have the shares put to you if the stock drops to or below the put buyer's breakeven price (the strike price minus the premium of the put). If this does not happen, the put expires worthless and you keep your premium, pocketing a nice gain.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I conduct freelance and contract work for Demand Media. I did not provide them with advance warning about my Seeking Alpha articles, nor do I anticipate negative consequences as a result.