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Demand Media Isn't the Devil

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It was a bad week on the farm.

Shares of Demand Media (NYSE: DMD  ) fell 15% last week -- and after 11% more of pummeling, they're now nearly 37% off this month's highs -- after a reportedly crushing tweak to Google's (Nasdaq: GOOG  ) search algorithm that rolled out early last week.

As a content-farm operator, Demand Media relies on high rankings for timely keywords through the leading search engines. The quality of the content that Demand harvests has come into question since the company went public at $17 a share three months ago, but now its flagship how-to website may be finally paying the price.  

Search-analytics specialists Searchmetrics and Sistrix are reporting that after last week's update, eHow has lost between half and two-thirds of the traffic it generates from Google.

Demand Media is fighting back this morning, conceding a slight setback in traffic while reiterating the financial guidance it provided back in February.

The dogged dot-com admits that the latest update at Google -- its biggest source for organic traffic -- has resulted in "moderately lower" page view growth. Demand Media sees page views across all of its properties for the current quarter as "comparable to, or greater than" where it was during last year's second quarter.

That may come as a relief to the worrywarts, especially since Google reported last week that its advertisers were paying 8% more per lead than they were a year earlier. However, analysts were targeting $73.4 million in revenue for the current quarter after Demand Media checked in with $60.4 million on the top line during last year's second quarter. Unless Demand Media's domain registrar business has a monster showing, Wall Street's bound to take that target lower in the coming weeks. Demand Media's content business also carries its thickest margins, so bottom line revisions are also likely.

Demand Media isn't evil. Content farms including Demand Media, Yahoo!'s (Nasdaq: YHOO  ) Associated Content, and AOL's (NYSE: AOL  ) Patch aim to monetize original content scripted by knowledgeable yet cheap freelancers. Is that so sinister? When Google began cracking down on content quality, the easy targets seemed to be scraper sites that slap ads on republished and occasionally unauthorized content or sites with more Google ad blocks than keyword-optimized content. Demand Media is simply responding to what consumers are searching for with timely content that it can create on a cost-effective basis.

No one's going to shed a tear for the opportunistic sites slipping in Google's rankings. Willie Nelson isn't going to reunite musicians for a Content Farm Aid benefit concert. However, it would be wrong to dismiss the genre completely after last week's update. Content farms specialize in search engine optimization. If anyone can get back into the hunt, why not Demand Media?

Are content farms evil? Tell us all about it in the comment box below.

Google is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers selection. Yahoo! is a Motley Fool Global Gains recommendation. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz wonders if content farms will be whittled down to mere petting zoos. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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