Demand Media stock reels on Morgan Stanley downgrade
Demand for shares of Demand Media dropped Wednesday after a Morgan Stanley analyst downgraded the Santa Monica company's stock and expressed skepticism that the website operator could continue to grow its online audience.
Demand Media, whose stock soared 33% to $22.65 on the day of its initial public offering a year ago, shaved off 42 cents, or nearly 7% of its value, to $5.92 in late afternoon trading. Demand operates a number of websites, including LiveStrong.com and eHow, that publish hundreds of thousands of quick, pithy how-to and advice articles and videos on a broad range of topics, from dieting to planting tomatoes.
Morgan Stanley analyst Scott Devitt, in his note on Demand Media, said the company's approach to mass producing content is under pressure as Google and other online search engines penalize sites that are deemed to have lower quality offerings.
Because Demand relies so heavily on Google in particular for its traffic, changes in the search company's algorithm have led to a precipitous drop in viewers coming to its sites, Devitt said. Demand lost nearly a quarter of its user base last year -- going from 124 million visitors in March to 94 million in December, he wrote.
Demand scrambled to boost its appeal to search engines by focusing more in "premium" content in October, but Devitt concluded, "We find little early evidence of success."
The Morgan Stanley downgrade came on the heels of news that three of the company's six co-founders had resigned Jan. 30. They include Larry Fitzgibbon, who had spearheaded Demand's efforts to grow its overseas audience; Joe Perez, executive vice president of product; and Steve Kydd, who headed the company's video unit.
A Demand Media spokeswoman declined to comment on the departures and the downgrade, citing an inability to speak publicly during a quiet period preceding its fourth quarter earnings announcement, set for Feb. 16.
-- Alex Pham
Photo: From left, co-founder and mergers and acquisitions chief Shawn Colo, president and CFO Charles Hilliard, and co-founder and CEO Richard Rosenblatt. Credit: Stefano Paltera / Los Angeles Times