What's Behind the Latest Action in Demand Media's Stock?

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If you purchased shares of recent-IPO Demand Media (DMD) this past week, chances are you are in the black. DMD opened the week at $23.40 and closed at $24.55 on Friday. It hit a low of $22.14 for the week during Monday's action, while peaking to a 52-week high of $26.46 intraday Friday.

I contacted company officials during the week to see what might be behind the move, but, not surprisingly, they declined to comment. I hope to land an interview with a top DMD executive here in the next week or two. As for this past week's impressive action, all I can do is speculate.

  • On Monday, investors took in reports from over the weekend, noting that Demand's flagship property eHow did not take as big of a hit as expected when the Google (NASDAQ:GOOG) geeks decided to recode their search algorithm. Other DMD-owned sites, such as Answerbag.com, did take it on the chin.

  • On Tuesday, Demand announced a partnership with Rachael Ray to serve as the "lead creative force" for the eHow Food channel. Following a similar pact with Tyra Banks, the celebrity cache should help DMD not only extend its brand, but boost its content's credibility while kicking up direct sales efforts.

  • Thursday saw Demand acquire Canadian live blogging website CoveritLive. Demand did not disclose terms of the deal, but the company played up CoveritLive's international reach and relationships with major brands, ranging from ESPN and Ford (NYSE:F) to Variety and TMZ.

  • Also on Thursday, Demand President and CFO Charles Hilliard presented at the Morgan Stanley Technology Media & Telecom Conference held in San Francisco. And, although not publicized at Demand's website, I discovered that the company's EVP of Products and one of its founders, Joe Perez, presented about social media and mobility issues at the Pacific Crest Securities Conference.

  • A week would not be complete without a reporter broadbrushing Demand's freelancer model. Joe Bercovici of Forbes blogged on Friday that what the company called a "developer's research project" could signal a transition from Demand freelancers working for "ultra-low rates" to them "earning nothing at all." The project, called MogulTown, would apparently create a competition of sorts where bloggers would blog against one another, for free, all the while providing content for Demand's stable of properties.

I doubt Joe's speculation impacted the stock much. And while the Rachael Ray and CoveritLive developments could prove pivotal, I don't see them as stock price drivers. At the end of the day, until these types of moves produce significant revenue, they amount to expenses. Rachael Ray, for example, likely won't work for free. That said, I don't know what her deal looks like. I bet, however, she won't be writing $15 How-to's like some hack sitting in his disgusting little apartment watching basketball, eating Chinese takeout.

Without confirmation from the company, all I can do is make an educated guess that the conferences, coming off of a strong earnings report, inspired buying of DMD stock, particularly on Friday. I don't know about Hilliard, but I hear that Perez is a pretty dynamic guy. Likely carrying the same message delivered by co-founder, Chairman and CEO Richard Rosenblatt during the company's earnings call, Perez could have generated a buzz about DMD's future.

An upside to the short shrift DMD receives in the media is that when you hear about the actual way the company functions, the breadth of its operations, and its future plans, you're nearly stunned by the reality that you're not being pitched by a "content farm." Rather, Demand Media represents a living, breathing company with enormous growth potential if it can shore up and expand critical areas of its business.

How to Play It

Last week, I suggested looking into selling DMD March or April $20 or $22.50 puts. Obviously, if you did, you would be in good shape right now. By the looks of the volume in DMD's newly-listed options, not many people made the gamble. I don't blame them. I didn't either. As the stock price not only holds, but increases further from the typical euphoria-induced IPO gains, I worry about missing the boat. I am also encouraged that we are not seeing a repeat of 1999-2000 when IPOs like Foundry Networks (formerly FDRY) and Extreme Networks (NASDAQ:EXTR) soared past the $100 mark out of the gates only to come crashin' like a drunk on a bar room floor. Thus far, DMD's gains appear reasonable. Only time will tell if they are justified.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.