DRIV: INCREASING OUR 2002 ESTIMATE AND RAISING OUR PRICE TARGET BUY RATING
PRUDENTIAL SECURITIES
December 4, 2001
Mark Rowen
Target: $25.00
Industry: Market Outperform
The senior analyst(s) has a material position in DRIV
BUSINESS
Digital River, Inc. (DRIV), based in Minneapolis, MN, is the largest enabler of online software
sales, and the leading Commerce Service Provider (CSP). DRIV provides e-commerce
outsourcing to software publishers, online retailers, and physical product manufacturers and
distributors.
HIGHLIGHTS
* We are increasing our 2002 revenue and EPS estimates for DRIV.
* We believe that in this difficult economic environment, large publishers are increasingly willing to
consider outsourcing their online software sales to providers such as Digital River.
* In addition, we believe the appreciation in DRIV stock has made it more likely that the company
will use its stock as currency for accretive acquisitions.
* We continue to believe that DRIV is a beneficiary of a channel shift toward online sales.
* We are introducing our 2003 estimates.
* We reiterate our Buy rating on DRIV and raise our price target to $25 (from $15).
DISCUSSION
We Are Raising Our Estimates For DRIV
We are raising our 2002 estimates for Digital River, Inc. (DRIV) due to several factors. We believe
that in this difficult economic environment, large publishers are increasingly willing to consider
outsourcing their online software sales to providers such as Digital River. In addition, we believe
the appreciation in DRIV stock has made it more likely that the company will use its stock as
currency for accretive acquisitions. Finally, we continue to believe that DRIV is a beneficiary of a
channel shift toward online sales. As a result of the improved environment for DRIV, we are
slightly increasing our 2002 revenue estimates to $86.3 million (from $85.1 million) and
increasing our 2002 EPS estimate to $0.42 (from $0.38).
Introducing Our 2003 Estimates
We are introducing our 2003 estimates for DRIV. We are projecting full-year 2003 EPS of $0.50,
and full-year 2003 revenue of $112.4 million. We note that full-year 2003 EPS is taxed at 38%.
We Are Raising Our Price Target On DRIV
While year-to-date (December 29, 2000 close through December 3, 2001 close) appreciation on
DRIV is an incredible 616% (compared to (23%) for NASDAQ), we believe strong fundamentals in
the company's business create room for further upside potential. We increase our FY'02 EPS
estimate to $0.42 (from $0.38), which, at current prices, translates into a
price-to-forward-year-earnings multiple of approximately 41 times. Assuming our EPS estimate
proves correct, our $25 target price assumes a P/E multiple of 60 times FY'02 EPS which is a 1.3
PEG ratio. We note that our $25 target is 50x our new FY'03 estimate. We reiterate our Buy
rating on DRIV and raise our price target to $25 (from $15). |
