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Jason Calacanis writes:

Sad to see Demand Media (DMD) getting crushed in the market.

Demand Media is a content farm (in every negative sense of the word) which (by some accounts) was crushed by Google’s (GOOG) most recent “Panda” update that was aimed at removing junk spam Demand Media from search results.

So to put this tragedy in perspective, have a look at DMD since its IPO:

[Click to enlarge]

Do you see that dip at the far right? The tiny little negatively sloped segment? Yeah, that’s what Jason is so upset about. Forget that these investors have lost 53% in six months (or only 37% off the IPO price of $17); that’s irrelevant. Talk about missing the forest for the trees.

But Jason inadvertently brings up an interesting point: Yesterday was the first day that company insiders were allowed to sell shares since the IPO. So at first glance, today’s selloff screams, “Thank God I can finally divest from this awful company!”

But that’s not quite right. Yesterday’s volume was not extraordinary; in fact, the stock was actually positive until 3pm, when it headed decidedly south (for an amusing take on that, see here). So what we really have here is a massive and sudden absence of demand for DMD shares, causing the price to collapse. In other words, this was investor-driven, not insider-driven.

But why would investors suddenly sell? The lockup expiration shouldn’t be a surprise; it’s public knowledge. It should have been priced in all along. Maybe not, though; it’s so hard to conceive of rational investors owning this stock that it’s equally difficult to give them the benefit of rational analysis. Let’s suppose that a news article about the lockup came out – and then was finally noticed by one large holder, who changed behavior accordingly. Then someone else notices, and pretty soon the herd is in a stampede. To be honest, the best evidence for this is Jason’s G+ post, which is otherwise completely unwarranted.

But the thing about rational investor analysis is that it doesn’t matter what reasons I can or can’t come up with. The facts are this: The stock of a terrible company happened to fall closer to its fair value ($0?) on the same day that its insider lockup expired. This attracted the attention of an individual who for some reason gave it more weight than the stock’s long term collapse, furthering the degree of attention paid to the myopic event. I must assume that there is a rationale (rational or irrational) for this behavior; to be frank, I don’t really care what it is.

Jason’s remark about DMD is quite bearable — without such armchair analysis, I’d be out of a job — but the balance of his post, on how cruel Google was to change its algorithm at the expense of DMD (and, by extension, his own company, Mahalo.com) is just ridiculous. Specifically:

The Google Panda Update was handled horribly by Google, which crushed hundreds of good companies without warning. Google has to take more responsibility for how they deploy big changes.

For someone whose past marketing pitch has been that algorithmic search engines are subject to manipulation, complaining that a refinement of the algorithm constitutes bad behavior is insane. After all, if companies legitimately deserve their search result rankings, then they shouldn’t change much in the aftermath — only if they achieved them through manipulation/optimization in the first place would there be repercussions. Caveat: you have to assume, and I do, that Google is interested in improving its product with any algorithm refinement, particularly one so publicized and welcomed by the community.

Because of this, I’m forced to perform my first Google+ “uncircle” (truthfully, as much as I love G+, “unfriend” is a much more satisfying verb). I just don’t have time to waste with this kind of nonsense.

Source: Pity Poor Demand Media - Or Maybe Not