Earlier this week, Slate Group's Jacob Weisberg tweeted, "It will be a sign of market sanity if Demand Media's IPO bombs this week." If midday trading is any indication, the market is still a little cracked in the head. Shares today have risen more than 35 percent following an initial public offering that valued the company at $1 billion. The offering put 8.9 million shares up for grabs, 4.5 million from Demand at $17 a share and 4.4 million from exiting shareholders, who at the last minute decided to unload a million more than expected. Hey, if shares are selling at higher than the expected $14 to $16 range, why not?! Demand's IPO, which is expected to raise $67 million, is part of the next wave of tech IPOs while the world waits for Facebook to go public in 2012. The biggest difference is that the other pending offerings, from Skype, LinkedIn, and Pandora, all represent beloved companies with, after a rocky start for Pandora, proven business models and public utility. Demand Media, the content farm responsible for articles like "Types of Hats for Kids," is another story entirely.
Demand Media has long been criticized for underpaying its army of 13,000 freelance copywriters and copy editors (reportedly around $15 to write and $3.50 to edit "How to Put on a Speedo" or its more complex offerings, like "How to Understand Ukrainian Women.") It's also frequently cited as one of the reasons Google's first page of search results have started looking so damn spamtastic. But when the company filed for an IPO last year, experts finally got a clear picture of its "magical thinking."
The company's SEC filing revealed that it looked profitable only if it used a creative accounting strategy that spread the cost of creating "content" over five years, using the argument that its articles are evergreen, and of course advertisers will want to buy ads on "How Do I Manually Fill an Ointment Tube?" for years to come. Not all of the company's content is that foolish. But because it hasn't even been around for five years, even Business Insider's Henry Blodget pointed out that questionable accounting "makes the company 'profitable' when it's actually hemorrhaging cash."
Tech-industry insiders are sick and tired of all the bubble talk, but it looks like investors aren't paying them much heed. It's going to be a rude awakening when Google 2.0 under Larry Page tweaks its algorithm to drive Demand's spammy content further down your search stream. But hey, the bubble's just getting started.
Demand Media shares soar 35% in IPO [CNN Money]
The Dumbest How-To Content From Demand Media [Daily Finance]
Related: Demand Media’s Questionable Accounting Over Freelance Writers