Three reasons to buy stock in Demand Media’s IPO (DMD)

Demand Media, Inc., isn’t profitable yet, but that doesn’t mean they won’t be in the future. Here are three reasons to consider buying stock in Demand Media’s IPO.

You might not have heard of Demand Media Inc. (NYSE:DMD), but you’re probably familiar with the company’s Web site eHow.com. eHow.com harnesses the power of some 13,000 freelancers from around the world to crank out “How To” articles on just about everything – literally.

The company uses search algorithms to figure out what people are searching for online, then they tailor “How To” articles at those searchers. Some recent titles on eHow.com? “How to fix a wet laptop” and “How to make green bean dog treats.” Enticing, right?

eHow has basically turned content into a commodity by cranking out one million articles a month. That’s the equivalent of four English-language Wikipedia’s every year, according to company founder and CEO Richard Rosenblatt. Demand Media sells the articles it produces to other media outlets or it publishes them on eHow.com where the company can reap long-tail advertising revenue presumably for decades into the future.

Demand Media isn’t profitable yet, but that doesn’t mean it won’t be in the future. Here are three reasons to consider buying stock in Demand Media’s IPO:

1) Highly targeted content is extremely valuable to advertisers on the Web. Think about it, if you’re landing on a Web page that’s titled “How to make green bean dog treats,” we can make some logical assumptions about you. Namely, you’re a dog owner who likes giving your dog exotic (and possibly expensive) treats. If I were a manufacturer of high-end dog treats, that’s precisely the sort of page where I’d want my company ad to appear. I’d be willing to pay a decent amount to get my ad there, too.

2) Content as a commodity. I spent a few weeks writing as a Demand Media freelancer last year until I started running out of topics that I could intelligently cover. One of the things I noticed about the freelancing process at Demand Media was the company’s dogged insistence on making sure the content I produced would remain relevant for years – perhaps even decades – to come. Since content on the Web never really goes away, Demand Media pays the upfront cost to have the article produced (a mere $15), and they could – in theory – be making money off that article for the next 100 years. It’s like a legal pyramid scheme that just might be minting cash a someday.

3) International expansion. Demand Media plans to use the cash it raises during the IPO to fund “international expansion, sales and marketing, as well as general purposes,” according to the Wall Street Journal. As the company expands into foreign-language markets, it should be able to exploit years of server logs to see which of its English-language articles have been the most visited and/or profitable. By focusing on those first, they’ll be able to quickly ramp up earnings in brand new markets.

Not convinced? Here are a few reasons to AVOID buying stock in Demand Media’s IPO.

Demand Media’s ticker symbol: NYSE:DMD.

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