Demand Media soars 40%; prices at $1.5B

The Web publishing company hits the NYSE Wednesday under the symbol DMD

Updated to add Demand Media's revenues and net loss for 2010.

Demand Media’s much anticipated and somewhat controversial IPO finally happened, and investors went gaga.

Shares soared 40% to $23.61 in early-morning trading. The stock of the digital publishing company was priced at $17 a share—$1 more than what many estimates had placed it at.  Demand Media sold 8.9 million shares for $151 million, giving the company a valuation of $1.5 billion.  It will hit the New York Stock Exchange floor Wednesday under the symbol DMD.

The company filed for the IPO back in August, but there were some accounting problems that weren’t adding up.  While CEO Richard Rosenblatt was insisting that Demand Media was profitable, its IPO filing revealed that it was more than $6 million in the red for 2010.  Its net loss for 2009 was $22 million and in 2008 it lost $14 million. By the end of September 2010, the company posted revenues of 179.4 million and a net loss of $31 million.

As it turns out, Demand Media was defining “profitability” a little differently: the company wasn’t including the cost of paying its writers upfront, but was spreading the cost out over five years.  Demand Media’s rationale was that each piece of content will continue to make money several years after it’s published, so the company is correct in spreading out the cost of paying writers over the course of several years.

It’s like saying you’re not drunk after five shots of patrón because it’s the only alcohol you’ll be drinking over the next five years.

The company currently has some 13,000 freelance writers on its roster, and those writers have slugged out about two million pieces of content.  

But Demand Media could be facing more obstacles, as Google recently took a stab at the company by announcing its plans to adjust its algorithm to filter out cheap content farms.  Currently, the Google algorithm ranks pages with duplicated content lower than pages with original content, but that hasn’t applied to sites like Demand Media that have made it their stated mission to churn out a lot of low-grade content on the cheap. 

“We hear the feedback from the web loud and clear: people are asking for even stronger action on content farms and sites that consist primarily of spammy or low-quality content,” said Google engineer Matt Cutts in a blog post.

Despite all the setbacks, Demand Media sold 19% more shares than it expected.  The company had anticipated selling 7.5 million shares at a price somewhere between $14 and $16 each. 

Image source: Jefferson Graham