November 20, 1998
Digital River Gains on Hopes For Online Software Shipping
By LISA BRANSTEN
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- Shares of Digital River continued to gain Friday on hopes for rapid growth in the market for electronic distribution of software.
In Nasdaq Stock Market trading, shares of the Edina, Minn., company rose 1 5/8, or 8.9%, to close at 19 7/8, adding to Thursday's gain of 4 13/16.
The Nasdaq Composite Index added 8.51 to 1928.21 and Morgan Stanley's high-tech 35 index gained 5.54 to 724.39.
Digital River makes systems that help online retailers sell and distribute software over the Internet. The company went public in August for $8.50 a share. But its shares had languished below the offering price for much of September and October, before starting to rebound along with much of the market in late October.
Adding to the optimism for the stock is a recent report from Jupiter Communications, a New York market-research firm, that pegs online software sales at about $2.4 billion by 2002. Ken Cassar, the analyst who wrote the report, said he hasn't any run any models, but said that his gut feeling is that about a third of that $2.4 billion in online software sales will be shipped electronically and the rest will be shipped in shrink-wrapped packages.
"Intuitively [electronic software distribution] makes a lot of sense to me, but things have to change from what we're looking at today," he said. Two factors are hampering widespread adoption of electronic distribution are. First, concerns of consumers and publishers about privacy and piracy will slow adoption of the technology. Second, slow download speeds means many titles can take hours to download -- though this will change as more consumers get superfast devices like cable modems.
Scott Ehrens, an analyst at Bear Stearns & Co., said he moved the stock up to a "buy" rating last month after the company reported earnings. He said the increase in sales for the third quarter to $5.8 million -- up from $683,000 a year ago -- showed companies were quickly adopting the company's technology. Since then, the shares have soared through his price target of $13.
Bear Stearns was one of Digital River's underwriters in its IPO.
Mr. Ehrens said one reason for the recent rally could be that investors are taking a second look at Internet stocks that have not run up as much as other Internet names. Although Mr. Ehrens said he believes Digital River has strong fundamentals, generally he is cautious about Internet stocks that have jumped in recent sessions.
"I'm not recommending that investors chase Internet stocks at these levels," he said.
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