What's up with the Demand Media surge?

Content producer beats Wall Street revenue, earnings estimates for Q4

Shares of Demand Media (NYSE: DMD) soared nearly 34% Friday after the Panda-vulnerable content farm reported a fourth-quarter loss of $6.4 million, or 8 cents a share.

Excluding one-time items, Demand reported a Q4 profit of $6.8 million, or 8 cents a shares, on revenue of $84.4 million.

That beat average analyst estimates of 7 cents a share on revenue of $83.1 million.

It's always nice to beat the Street, but does that warrant shares of Demand soaring to 7.93 Friday before closing at 7.76, or 30.6% above Thursday's final share price of 5.94?

Only if you think you're buying low and you believe the company's future looks bright.

True, shares of the content farm are priced low these days relative to prices in the 13 months since it went public in January 2011. Shares closed Thursday at 5.94, not far above the all-time low of 5.24. Dismal numbers for anyone who purchased shares any time up to last April 15, which was the last time the stock was above $20.

As far as being confident in Demand Media's future, I'm not sure what Friday's eager buyers are seeing. Demand on Thursday forecast fiscal 2012 revenue between $351 million and $358 million. Taking the top end, that would translate into year-over-year revenue growth of 10%, versus 28% revenue growth from 2010 to 2011. That's not much to get enthused about.

Further, this is a company that saw three of its six co-founders abruptly quit in late January. On top of that, Morgan Stanley downgraded Demand shares last week to "underweight" from "equal weight," with analyst Scott Devitt telling clients in a research note that it appears the company's strategy of upgrading its content wasn't showing tangible results.

Of course, the whole reason Demand said it was trying to improve the quality of its content offerings on sites such as eHow is because traffic was devastated last year when Google's Panda project changed algorithms to prevent sub-par content sites from gaming user search results with SEO and keyword trickeration.

Well, Google retains the ability and right to change more algorithms. And when you're business is gaming the system -- as Demand's is -- and you aren't in control of the system ... well, then you're simply at the mercy of the Googles of the world. It's like having a business plan based on the weather.

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