Why Demand Media Shares Plummeted

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Demand Media (NYSE: DMD  ) were falling out of demand today, dropping as much as 24% after the online media company cut its revenue outlook for the current quarter.

So what: Demand Media, which functions as an Internet domain services provider, said it now expects sales between $100 million and $101 million for the second quarter, down from previous guidance at $105-$107 million. The parent of EHow.com, and other sites, held its adjusted EPS guidance for the quarter at $0.08-$0.09, but added that it has seen a drop in search engine referral traffic. The company also announced it acquired Society6, a website for selling independent artworks similar to Etsy.com, for $94 million, and said it would update its full-year guidance at its next earnings report.

Now what: Investors have been increasingly concerned about Demand's dependence on Google, which has been refining its search algorithm to filter out so-called content farms, as Demand is sometimes maligned. Last night's announcement also prompted two analyst downgrades, as Stifel Nicolaus dropped the stock from buy to hold, noting the negative impact from changes to Google search. Demand Media is only marginally profitable now, and seems to offer no clear value proposition for users. I'd stay away from this one.

To stay up to date on Demand Media, all you have to do is add the company to your Watchlist here.  


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