How One Google Algorithm Update Can Kill a Business

Changes to Google's algorithm can impact website traffic. Is your investment safe?

May 28, 2014 at 8:22AM

If you invest in an Internet company outside of a select group of premier websites, you're putting at least a little bit of trust in Google (NASDAQ:GOOGL) (NASDAQ:GOOG) not to foul things up for you.

Last week, shares of RetailMeNot (NASDAQ:SALE) slid over 20% over the course of two days after a report from SearchMetrics found that the website's visibility had fallen 33% on Google's search engine. The decline came after Google released an update to its search algorithm, dubbed Panda 4.0. Considering that RetailMeNot receives approximately 65% of its traffic from search engines, this could be a huge blow to the number of people clicking on its coupon codes.

RetailMeNot is not alone in its vulnerability to Google's algorithm changes. Demand Media (NYSE:DMD), the company behind, has seen its traffic decline significantly since Google started rolling out the Panda algorithm and its subsequent updates. There are countless other companies that have been affected by Google's constantly updated ranking algorithm, and recent events show the importance of evaluating the risks such updates pose to your investments.

Let's examine why Google penalized these companies and what investors can learn from recent events.

What is Panda 4.0 exactly?
Google's focus, when it comes to search, is to provide the highest-quality sources to answer a user's query. With Panda, Google's goal is to reduce the prominence of websites with low-quality content and promote authoritative sources.

Panda 4.0 is just the latest major update to the algorithm. Google released the original version in 2011 and has made monthly updates since. Significant changes from the previous algorithm include more "user feedback signals" and a modification factor that applies to the entire site, not just individual pages, that can penalize spammy websites for every search term.

Overall, these updates affected about one-eighth of the Internet. The most recent update, 4.0, was said to affect 7.5% of websites.

How and why Google subverted Demand Media
Demand Media's most important property is The website accounted for 30% and 31% of the company's total revenue in 2012 and 2013, respectively. No other property accounted for more than 10% of revenue. Last year, acquired half of its traffic from Google searches, according to the company's 10-K report.

Unfortunately for Demand Media and its shareholders, is exactly the type of website Google is punishing with its Panda updates. The site's content is often vague and uninformative. The writers usually show very little, if any, subject expertise, and viewers quickly realize the site probably doesn't have the answers they were looking for.

Demand Media follows similar models for most of its web properties, which also rely heavily on search traffic. As a result, unique visitors across Demand Media's sites fell from 120 million before Panda to 88 million in January 2014.

DMD Revenue (Quarterly) Chart

DMD Revenue (Quarterly) data by YCharts
Algorithm changes at Google had a negative impact on Demand Media's revenue in 2013

Does RetailMeNot deserve the same treatment?
RetailMeNot follows some spammy tactics when it comes to acquiring links to its site. The company has been criticized for this in the past, but the fact is that it doesn't do anything drastically different from its competitors. One factor that may (or may not) have affected RetailMeNot's search dominance in the past is its tie to Google Ventures -- the venture-capital arm of Google -- which supposedly gives it better access to the internal workings at Google.

Although RetailMeNot may have used questionable tactics to dominate Google's search results in the past, that doesn't mean the website itself is spammy or non-authoritative. (There aren't a whole lot of websites out there that are experts in Bed Bath & Beyond coupons.) Conversely, an eHow article about how to change your oil may have been better written by a mechanic on a car-centric website.

If you look at RetailMeNot's competition, the site actually performs its task admirably well. Out of all of the promo-code and deals aggregators, RetailMeNot is arguably the best of the bunch. It has a clear web layout, an active community that weeds out bad coupons, and a strong brand.

Still, that doesn't make it immune to penalties from Google. Considering, however, that RetailMeNot performs its function well and its biggest infraction was how it developed links to its website, it's likely this penalty is more temporary than the one for Demand Media.

Is your investment Google-proof?
Google is constantly working to provide the best product it can for its users. Companies with large exposure to Google as a source of traffic are at significantly more risk than sites that can organically attract audiences. Still, nearly every web property uses search traffic to some degree to create an audience.

The question investors need to ask before investing in a web company is how much authority the company's web properties have in their domains. and other Demand Media properties have very little authority. RetailMeNot has some authority, but Google saw its business practices as spammy. Spammy tactics can be overcome through a behavior change, but a lack of authority is nearly impossible to overcome.

Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond, Google (A shares), Google (C shares), and RetailMeNot. The Motley Fool owns shares of Google (A shares) and Google (C shares). 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. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers