In late January, online content company Demand Media (NYSE:DMD) pulled off a successful IPO.  On its first day of trading, the shares spiked $33% to $22.65.

The stock would eventually reach $27.33.  However, over the past couple weeks, there has been some concern about the company, especially with its relationship with Google (Nasdaq:GOOG).

But with Thursday’s earnings release, Demand Media was able to allay some fears.  On the news, the stock price climbed 8% to $17.66.

So are the problems a thing of the past, or should investors still be worried?  Let’s take a look:

Pros

Interesting business.  Demand Media operates a variety of websites – like eHow.com — and the content comes from over 13,000 freelance writers. The company will then sell ads to generate revenue. 

 Secular trends.  No doubt, more companies are shifting their advertising dollars to the Internet.  And this is propelling the business of Demand Media.  In the latest quarter, revenue spiked 48% to $53.6 million. 

Content quality.  As Demand Media’s user base expands – and it generates more cash flows – it is finding ways to boost its content offerings.  For example, the company has struck a partnership with Tyra Banks to create typeF.com, which is focused on fashion and beauty.  Then there is the recent deal with Rachael Ray, who will lead the creative development at the eHow Food channel.

Cons 

Marketing.  To increase traffic, Demand Media works hard to target keywords for Google and other search engines.  The problem? Google recently changed its algorithms to make it harder to get high rankings. 

 This is important since about 29% of Demand Media’s 2010 performance-based revenue came from Google.  In fact, because of the search algorithm change, referrals for eHow fell 20%.

Acquisitions.  An important part of Demand Media’s strategy is to buy content sites and other online properties. However, such assets have seen a jump in valuations.  Thus, it will be tougher to get low-cost deals.

Registration business.  Demand Media manages more than 10 million domain names — it is the world’s largest wholesale registrar.  Unfortunately, this is mostly a commodity business. 

Verdict

Demand Media has built a highly scalable online advertising business, which has lots of growth potential.  In the last quarter, it produced $14.1 million in discretionary free cash flow.

And while there is competition, it is from companies that have their own challenges.  These primarily include AOL (NYSE:AOL) and Yahoo! (Nasdaq:YHOO).

What about the issues with Google?  Demand Media has shut down its program that allowed anyone to publish on eHow.  The company will now increase fees and be more selective with its authors.

While this should pay off in the long run, it could easily cause disruption over the next couple quarters.  In light of this, the cons outweigh the pros on the stock for now.

Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli.  He does not own a position in any of the stocks named here.