BOSTON (AP) — Shares of Demand Media surged Tuesday after a Goldman Sachs analyst said investors have overreacted to the potential threat of a change in how Google culls search results.
THE SPARK: Analyst Jordan Monahan raised his rating for the online content publisher to "Buy" from "Neutral."
THE BIG PICTURE: Demand Media employs a network of more than 13,000 freelancers who churn out web content to its eHow.com and Livestrong.com websites. The articles are based on frequently searched topics, and most referrals that drive traffic to Demand's websites come from Google.
Shares of the Santa Monica, Calif. company debuted in an initial public offering on Jan. 26. But the stock was hurt after Google Inc. announced recently that it had rewritten its search formula to demote "low-quality" content in its influential search rankings.
Investors fear Google's move will reduce traffic to Demand Media instructional articles that cover topics such as "How to Thread a Sewing Machine" and "How to Finish Knitting a Scarf." Shares of Demand Media have fallen about 40 percent since mid-April, 20 percent below the stock's price at the initial public offering.
THE ANALYSIS: Monahan wrote that changes at Google are likely to reduce earnings at Demand Media Inc. by less than 10 percent. He said the company's management is modifying its content and taking other steps to improve online traffic. By year-end, Monahan expects traffic at eHow.com will return to levels seen before Google revised its search formula. He called Demand Media "a unique business model and one of the fastest-growing Internet companies."
SHARE ACTION: Shares of Demand Media rose $1.21, or 9.2 percent, to $14.35 in afternoon midday trading. The stock has traded in a range of $12.56 to $27.38 this year. On the first day of trading, shares jumped 35 percent after debuting at a higher-than-expected price of $17 apiece.
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