Is Google's Panda devouring Demand Media traffic?

Content farm's shares drop nearly 11% after reports that algorithm update is negatively affecting page views

In late February, soon after Google announced a change to its algorithms designed to "reduce rankings for low-quality sites" -- an initiative dubbed "Panda" -- it appeared content farm Demand Media had dodged the bullet many industry observers felt was aimed right at it.

While traffic for a number of other content farms such as Associated Content and mahalo.com fell drastically, Demand Media's flagship eHow.com was relatively unscathed.

(Also see: Demand Media: Worst IPO of the year)

However, after another round of Panda algorithm changes last week, it looks like Demand Media has taken a direct hit. And so has its stock.

Shares of Demand Media (NYSE: DMD) tumbled nearly 11 percent on Monday after SEO software firm Sistrix GmbH published a report showing that eHow.com's visibility on Google has plummeted 66% since the update.

Demand's stock closed at 17.33, or 10.6 percent below Friday's closing price of 19.38, on volume of 1.59 million shares. That's the biggest trading volume for Demand since Jan. 27, the day after the company went public. It's also the lowest closing price for Demand shares, which were priced at $17 for the IPO.

In a bid to counteract news that Panda is eating into its traffic, Demand issued a statement Monday both reaffirming its financial outlook for fiscal year 2011 and attempting to debunk the reports:

Certain third parties that have published reports attempting to estimate the effect of recent search engine algorithm changes made by Google on traffic to the Company's owned and operated websites have significantly overstated the negative impact of those changes on traffic to eHow.com, as compared to the Company's directly measured internal data. Recent search engine algorithm changes have negatively impacted search driven traffic to some of our websites, including eHow.com, resulting in moderately lower year-to-date page view growth for the Company's owned and operated Content & Media properties compared to page view growth rates before the algorithm changes. Nevertheless, the Company currently expects that its year-over-year page view growth across its owned and operated Content & Media properties in the second quarter of 2011 will be comparable to, or greater than, the year-over-year page view growth achieved in the second quarter of 2010.

Demand is scheduled to announce first-quarter results on May 5. Since the quarter ends March 31, before the latest Panda update, we won't know the extent of the damage to Demand's traffic. But you can expect analysts to ask about it.

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