Demand Media Inc.’s stock price dropped sharply last week after a report claimed that changes to Google Inc.’s search algorithm hurt Demand’s flagship website, eHow. But despite the stock decline, some industry watchers don’t think there’s cause for concern.
Two analysts rated the stock “outperform” and one rated it “buy” April 18. That was the same day shares tumbled more than 10 percent in response to a report by Sistrix, a search engine optimization consulting company in Bonn, Germany. The report, issued shortly before, stated that the changes to Google’s search algorithm caused eHow’s “visibility” to drop 66 percent.
The drop means that when someone did a Google search for a certain key word, eHow articles appeared less than they did in the past.
Larry Fitzgibbon, executive vice president of media and operations for the Santa Monica company, responded to the report in a blog post April 17, writing that it was “significantly overstated.” But that didn’t stop Demand’s shares from falling. The stock price tumbled more than 26 percent to $15.85 for the week ended April 20, making it one of the LABJ Index’s top 10 losers. (See page 58.)
Danny Sullivan, editor in chief of the blog Search Engine Land, said that analysts still like the company because they haven’t seen the rop in traffic reflected in Demand’s revenue.
“It’s difficult to know whether the traffic that dropped went to their bottom line or not,” Sullivan said. “I suspect that eHow probably did see some traffic drop. But I would tend to be more concerned as I watch the quarterly earnings and what’s happening with revenue.”
A company press release April 18 reaffirmed projected first quarter revenue of $69.5 million to $73.5 million and annual revenue of $310 million to $325 million. Demand will report first quarter results May 5.
Revenue was up 33 percent to $73.6 million in the fourth quarter last year. Net income was $1 million compared with a net loss of $3.9 million in 2009’s fourth quarter.
However, Bo Peabody, managing general partner at New York venture capital firm Village Ventures, said it could be difficult for Demand to meet its projections if traffic falls as a result of the search changes.
“They’re playing a dangerous game by relying on an algorithm that’s very difficult to understand,” Peabody said. “The traffic decline is going to hurt them before they can make it up in direct ad sales.”
Content farm
Google began rolling out changes to its search method in February to reduce the rankings of content farms, web sites that churn out hundreds of low-quality articles. Critics have called Demand a content farm because its sites, including eHow, display how-to articles and videos that the company commissioned at low rates from freelancers.
Demand has said its sites would not be significantly affected by the search algorithm changes. But Google’s most recent change, meant to target mostly international websites, appears to have cut down on search results for eHow.
In his blog post, Fitzgibbon admitted that some of Demand’s websites, including eHow, have seen a decline in referrals from Google. He did not say how large the decrease was, but added that visits from nonsearch sources “continue to grow rapidly.” In other words, people are going directly to eHow or finding it through other means.
Demand declined a request for comment.
Sullivan said Google’s actions send a signal to Demand: The company should continue to find ways to draw traffic and visibility without relying on Google searches.
“Potentially, it could be a warning sign that they react to,” he said.
