Demand Media: How To Profit From How-To Content

| About: Leaf Group (LFGR)

Demand Media (DMD) has over 100 million unique visitors monthly, most of which come from searches for how-to articles published by the company's eHow segment.

The web has matured into the defacto resource for advice on everything from potting plants to changing headlights.

According to Comscore, Demand Media's sites attract over 120 million unique visitors a month, up from less than 100 million a year ago. It's the #1 site for Home & Garden and #2 for Humor and Personal Finance. In short, it's carving out significant share in some of the most rewarding ad markets.

Demand for knowledge on "the little things" has turned Demand Media into the 14th largest media property in the country.

The mystery behind the company's eyeshare success comes from its use of advanced analytics.

Those analytics quantify what people most want to read, allowing the company to create increasingly relevant and ad friendly content. Such content contributed 64% of company sales last quarter - some $59 million.

As long as people continue to try to fix their lawn mower or learn how to sew on a button, the company's content will generate ad revenue.

This is a more powerful content model than news driven media, which loses its luster as attention shifts day-to-day.

It also allows the company to leverage its most successful content across new click friendly formats, such as video. Sales growth is also likely from expanding its presence in niche content, which it is already playing through sites GolfLink, and

The company is also the largest wholesale registrar of domain names.

There are 230 million registered domain names, of which 74% are renewed. An additional 11% growth occurs annually. As a result, the company's eNom segment produces about 36% of Demand Media's sales.

As domain names shift to specific categories, such as .home or .app; the company should see additional growth.

Growth and a healthy balance sheet are attractive.

The company is guiding for 17% sales growth in Q3 '12 from a year ago, a bit better than the 16% it recorded in Q2. Margins should also tick up slightly to 28% from 27.7%. In Q2, these results generated free cash flow of $16.6 million.

The company is debt free, with roughly $1.18 in cash per share, and there are over 10 days to cover short. It's beaten analyst expectations in each of the past four quarters and analysts have ratcheted up their estimates to $0.46 in 2013, up from $0.42 90 days ago.

Given the company's proven ability to translate content into earnings, it makes the company arguably attractive to potential acquirers who are also building eyeshare. Two such companies that come to mind are Yahoo! (NASDAQ:YHOO) and AOL (NYSE:AOL), both of which have a lot of cash and little debt. With shares roughly 60% off their post IPO peak from spring 2011, investors might want to take a closer look.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DMD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.