After news of the Demand Media IPO filing came out late last week, I was not that surprised to get an email from someone deeply involved in building an online content business.

“If they are worth over a billion with those financials, I can’t wait to find out what we are worth. What am I missing?”

Well, nothing actually, as Demand’s filing to raise $125 million in an initial public offering at a reported $1.5 billion valuation showed that making it big in the online content business was still slow going.

That said, Demand is surely going and, in fact, growing smartly from $170.3 million in revenue in 2008 to $198.5 in 2009 to possibly reaching–based on six months of 2010 results–well above $230 million in 2010.

That’s due to its increasing growth in traffic, largely via Demand’s popular eHow site and a network of others. According to the most recent numbers from comScore (SCOR), Demand’s properties make it the 17th-largest in the U.S., with 54.6 million unique monthly visitors.

But the media business at Demand is still small, relatively speaking to other big content companies, with the content and media part of the revenue representing almost 60 percent of the business (a domain registrar business makes up for the rest).

And, most importantly, it is still unprofitable.

The Santa Monica, Calif.-based start-up said that, for the six months ended June 30, the company posted a loss of $22.3 million on revenue of $114 million. It was an improvement over a loss of $28.9 million on revenue of $91.3 million in the same period of 2009.

Using less strict accounting, on an operating basis, the picture is better, with the company’s loss cut to $4.7 million from $12.3 million in the same six months.

And using even less stringent non-GAAP financial rules, called, “Adjusted OIBDA,” Demand said in its regulatory filing with the Securities and Exchange Commission Friday that it made $25.6 million in profits.

As MediaMemo’s Peter Kafka wrote over the weekend:

Some investors may balk at these non-GAAP numbers, but Demand, Goldman Sachs (GS) and its other underwriters clearly think there’s a market for them. And there’s certainly a hunger in the tech world for a big, brand-name IPO to break the dry spell. You can feel people willing this thing to work.

If Demand did, say, $55 million in OIBDA this year, it would need a multiple of 18 times trailing 12 months earnings to get to a $1 billion valuation. It would need 27x to get the $1.5 billion number that people are whispering to reporters.

Another way to get to $1.5 billion: Project OIBDA of $100 million for 2011, and ask for 15x on that number.

That’s a good thing since Demand, which has raised $355 million in funding since its founding in 2006, has only $33.6 million in cash left in its kitty–probably plenty to keep going–but it’s likely to need more investment to crossover to where it would not need any more money. (There is a $100 million untouched line of credit, but Demand is unlikely to want to dip into that right now.)

Hence, the IPO, which will give it both cash and stock to use to grow itself, either organically or via acquisition, all while keeping the costs of content creation lower and lower via innovative technology.

For Demand CEO Richard Rosenblatt–who has a series of notable financial wins so far, selling such Internet properties such as iMall and MySpace for big windfalls–it will be interesting to see if he can build the business for the long term, which he has said is his intent.

He might want to pay attention to the travails of AOL (AOL) CEO Tim Armstrong, who has plotted a very similar course in the content arena in order to turn around the long-suffering Internet icon.

The former Google (GOOG) exec is facing strong headwinds in doing so, with his legacy subscription access business dying faster than expected, while his advertising revenue remains frustratingly flat.

Armstrong has his hands full building up that content business while also fixing all the various maladies of AOL’s past.

Last week, in AOL’s most recent quarterly report, that was eminently clear, with revenue and earnings below already low Wall Street expectations.

“Nobody likes to show up to these calls and report down numbers in an up market,” said Armstrong in the investor call after the results were released, noting that AOL was in the midst of a long turnaround and “eventually” investors would be able to see results.

Eventually is a good way to put it.

Last year, Yahoo EVP Hilary Schneider and then-Media Group head Scott Moore had a summery seaside dinner with Demand Media co-founder and CEO Richard Rosenblatt (pictured here) in Santa Monica, Calif., right around the corner from the online publishing company’s HQ.

While many speculated that Yahoo (YHOO) could be doing some friendly kibitzing to get a sense of where the eclectic network of general- and special-interest sites was headed, for a possible acquisition, nothing came of it.

That’s because at the time, Rosenblatt insisted that he was aiming to eventually take his company public and Yahoo was in the midst of ongoing corporate turmoil.

“There is a lot of potential here and I want to build a big company for the long-term,” said Rosenblatt in an interview with BoomTown last July (see video below).

But, as my post noted: “Still, at some point when Yahoo is not in the free fall it is currently in, Demand might make a great purchase for Yahoo.”

And now, a year later, as new Yahoo CEO Carol Bartz works to stop that slide, several sources close to the company tell me another look-see at Demand is likelier than ever.

That’s underscored with recent indications that a major strategy will finally follow through on making Yahoo’s massive but disparate service more social, especially its content offerings.

But would Bartz go as far as making a big buy now or would she be more likely to strike a massive partnership with Demand, from which Yahoo could learn a lot?

Such an acquisition could cost anywhere from $1.5 billion to–as was floated last year in better times–$3 billion. In addition, if Demand was to engage in more serious talks with Yahoo, there would likely be other suitors.

As costly as that is, some sort of link-up with Demand is an interesting idea, especially since Yahoo could use a bold and definitive move to signal social goals that play to its strengths and are not a copycat of more powerful social-networking sites now in place.

At a Morgan Stanley (MS) conference last month, Bartz said, for example, that “I do not believe we can invent the next Facebook,” while noting Yahoo still needed to be more social throughout the service, especially in its content.

And, just yesterday, a Reuters article about that focus was titled: “Yahoo’s Plan: Create Community from Isolated Sites.”

Said the article: “If [Yahoo co-founder David] Filo and new CEO Carol Bartz have their way, the kinds of social networking features available on Facebook will become part of many Yahoo websites and allow their users to network with each other without using Facebook. The company hopes the strategy will help link its disparate properties, bringing more advertising dollars and growth.”

And that’s just at the heart of Demand Media, which dubs itself the “leader in social media.”

Demand was founded in 2006 by Rosenblatt and Shawn Colo, who raised a giant pool of funding–$355 million–from gold-plated investors like Goldman Sachs (GS), Oak Investment Partners and even a private investment from major Yahoo investor Gordon Crawford.

Getting that kind of backing was due to Rosenblatt’s entrepreneurial track record.

As founder, chairman and CEO, he sold iMALL to Excite@Home for $425 million in a 1999 stock swap.

And, perhaps most famously, as CEO of Intermix Media, Rosenblatt sold it with the company’s crown jewel, MySpace, to News Corp. (NWS) for $580 million in cash.

Then, Rosenblatt started Demand, which takes user-generated content of all kinds and on all kinds of topics–especially via video–from an army of freelancers and leverages it into massive traffic that it monetizes.

Demand is also the one of the bigger suppliers of video to YouTube, which it also monetizes.

And, through the acquisition of Pluck, the company also laces social-networking tools throughout the sites, as well as for many well-known third parties.

All this has given Demand upward of 70 million unique visitors per month, at sites like eHow and GolfLink.com, with about $150 million in annual revenue.

And–drum roll please–it is reportedly profitable, although how much is not clear.

While he has long maintained a public offering was on the horizon, despite the weak economy, Rosenblatt has also been interested in the idea of how to revive major players like Yahoo and Time Warner (TWX) online unit AOL.

Both have been struggling, but still have massive traffic and brand recognition, along with large advertising businesses.

And in many ways, the energetic Rosenblatt is just the kind of product-centric and visionary exec Yahoo lacks, despite Bartz’s clear ability to get the company’s management ducks in order.

What could be even more interesting, said one source, would be to marry Yahoo and Demand with a lot of what is going on with the publishing of niche sites at AOL’s MediaGlow content unit, in a giant publishing network.

Ironically, AOL was another acquisition target of Yahoo, in yet another deal that did not pan out last year.

Here’s the interview with Rosenblatt at Demand Media HQ last year: