Feeling the Heat from Digital River [Barrons TECHNOLOGY TRADER By BILL ALPERT 3.21.05]
DIGITAL RIVER HAS GOTTEN ITS BILLION DOLLAR market value by selling lots of downloaded copies of Symantec's Norton AntiVirus. The e-commerce firm has also kept its shares aloft by silencing stock analysts with the threat of a lawsuit.
At the demand of Digital River's lawyers, a small Minneapolis broker near the company's headquarters dropped coverage last Tuesday. Brokerage firm Miller Johnson Steichen Kinnard had been bullish on Digital River stock (DRIV) before Jan. 4, when MJSK's analyst downgraded the shares to a Sell. Earlier this month, Digital River demanded that the broker correct some mistakes in its research. The broker obliged. Digital River then told the broker to discontinue coverage by noon of last Tuesday, or face a lawsuit. The little brokerage firm knuckled under.
Digital River's CFO, Carter D. Hicks, told me that his company wasn't censoring the coverage of its stock. "We respect the right of analysts to have negative opinions about our business," said Hicks. "But our goal is to ensure that the information that is out there is factual."
Erroneous Buy recommendations hurt investors, too. Back in the last dot-com bubble, analysts had urged investors to buy Digital River shares at 20 times revenue, before the stock plunged from 56 to 2.38. I asked Digital River's CFO if the company had ever threatened suit to correct a Buy recommendation. Not that he could recall, said Hicks.
The MJSK brokerage firm is no bear's den. Just five percent of its ratings are Sells. Analyst Jay M. Meier had been a bull on Digital River since the stock was under 8 bucks in July 2002. Over the years, he defended the shares from bears who said Digital River's business wasn't growing. Meier compared the company to eBay and Yahoo!
By selling downloaded versions of software products from Symantec, McAfee and others, Digital River grew revenues 50% last year to $154 million. About half of that growth came from acquisitions. The company earned $35 million, or 96 cents a share. On Thursday, the company said that better than expected sales in the current March quarter would lead to quarterly earnings of 33 cents -- or 50 cents, if you ignore those pesky non-cash charges that count under generally-accepted accounting principles, or GAAP. The shares closed Friday at 31.48.
Looking Shaky: Weakness in the technology sector, exacerbated by rising energy prices and trouble elsewhere in the market, knocked the Nasdaq down by 33.81 points, or 1.66% last week. Its Friday close of 2007 marked its low for 2005, in which it has fallen 7.7%.
But late last year, Microsoft started getting into the antivirus business and analyst Meier concluded that Digital River's most important stream of revenue growth would come under competitive pressure. He downgraded the stock to a Sell on Jan. 4 and subsequently reduced his price target from 34 to 14.
Digital River's lawyer sent a letter on March 7, demanding that the broker correct the "intentional" inaccuracies in Meier's reports and do it by March 10th. The letter complained that Meier had changed from a price-earnings multiple of 36-times to 1.5-times. The brokerage duly issued corrections of two errors that Digital River had pointed out. But Digital River's lawyer was wrong about the P/E multiple. Meier's 1.5-times number was price-to-earnings growth, which on projected growth of 14% corresponded to a none-too-stingy 21-times P-E.
Digital River wasn't satisfied with MJSK's corrections. Its lawyers sent a new letter, demanding that Meier and his firm drop coverage forever -- by March 15 -- or face a lawsuit. So on March 15, the little brokerage discontinued coverage.
I asked Digital River CFO Hicks if his company had threatened legal action against MJSK or other brokerages. Hicks said that was just a "rumor," although I had heard key portions of the letters and asked Hicks about the substance. He also refused to answer any of my questions about Meier's reports, which had estimated that Digital River's balance sheet had $19.5 million worth of goodwill and intangibles that couldn't be accounted for by the company's announced acquisitions.
Analyst Meier says he's getting supportive calls from all over the country. "We were looking out for the best interests of our customers," he says. "It's my impression that I am supposed to rate a company a Sell, if I think a stock is going to go down." |
