Demand Media (NYSE: DMD) is certainly in demand this morning, as the online content producer's IPO opened at $23.50 after pricing last night at a mere $17 a share. It also boosted the number of shares sold from 7.5 million to 8.9 million.
Demand Media may not be a widely recognized dot-com media mogul, but its portfolio of vertical websites attracts more than a whopping 100 million unique visitors a month. Armed with a growing army of freelancers, Demand populates its websites with timely content. Demand's properties include how-to website eHow, outdoor hiking guide hub Trails.com, and the Cracked.com comedy site.
Demand's model isn't unique. Yahoo!'s (Nasdaq: YHOO) recently acquired Associated Content has an even larger base of freelancers, but Demand's vetted contributors are an ambitious lot. Demand has published more than 3 million articles and 200,000 videos. Beyond its own sites, Demand deploys its content through third-party sites including Gannett's (NYSE: GCI) USAToday.com.
It all adds up. Revenue climbed 17% to $198.5 million during 2009, and the growth has accelerated through 2010. The one rub here is that Demand has struggled to turn a profit, though it likely cleared an operating profit in its December quarter.
Demand isn't cheap. Today's pop will likely mean that underwriters go for the full over-allotment, giving it a healthy 82.6 million shares outstanding. In other words, the dot-com darling's market cap is just shy of $2 billion. Yahoo! shelled out just $100 million for Associated Content last year, though it reaches a much smaller audience.
The $2 billion sticker may just be a number, but it prices Demand in the same enterprise-value ballpark as established web giants AOL (NYSE: AOL) and IAC (Nasdaq: IACI).
Demand is growing faster than both of those companies, but investors may want to wait and see if this seemingly scalable model can ever deliver consistent profitability at attractive margins.
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