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Pastimes : KZAP's Stock Talk Thread -- Ignore unavailable to you. Want to Upgrade?

To: KZAP who wrote (88)	1/6/1999 9:31:00 PM
From: Don P.	Respond to of 410

KZAP, Here's a pretty nice article that appeared on iionlin.com today. To: Elliot Winter (632 ) From: Mr. Miller Wednesday, Jan 6 1999 5:58PM ET Reply # of 646 Digital River: Internet Darling Makes Big Splash Analyst: Chris Bulkey (1/6/99) (REVISED) No kidding. Here's an Internet company with the potential to establish a dominant franchise that has yet to reach a ridiculous valuation. Let me first explain Digital River's (NASDAQ: DRIV) technology and its usefulness. Digital River provides electronic commerce (e-commerce) software solutions to software publishers and online retailers. Customers essentially use, through an outsourcing relationship, Digital River's suite of more than 131,000 software and other digital product to sell products on their own internet site. During the third quarter 187 software publishers and 416 online retailers chose to outsource their e-commerce needs to Digital River, bringing its total number of clients to 2,071. Hello Wal-Mart A good example of how the technology is used occurs in a recently announced deal with Wal-Mart (NYSE: WMT). Analysts believe this deal validates the company's Electronic Software Download (ESD) platform, and is merely a harbinger of things to come. By accessing Digital River's extensive online inventory of software products, Wal-Mart plans to add additional items to its consumer product offerings, which is located on Wal-Mart's web site. According to Scott Benedict, category manager of Wal-Mart online, 'Digital River is an excellent software distribution partner for us. We are able to furnish our customers with the ability to make purchases from the largest selection of software available on the Internet'. This deal will be a key in raising Digital River's profile, as the dominant provider of ESD technology. Is there a market for this relatively new technology? Jupiter Communications thinks so. It predicts that online software sales will reach $2.3 billion by 2002, rising from $69 million in 1997 for a staggering compounded annual growth rate of 79.4%. According to P.C. Data, sales of software by retailers, in general, have shown signs of strength. In 1997, retail sales of software products increased 16.5% to an estimated $3.3 billion. With the overall trend in retailing shifting toward a focus on Internet sales, it becomes obvious that someone will have to provide the software to allow retailers to market their wares over the web. That's why Digital River has so much potential. Competition? What Competition? You're probably wondering what advantages Digital River's has over its competitors. Well, there are few, which adds to its allure. According to BancBoston Robertson Stephens, the company has already secured a critical mass of outsource clients, which effectively dominates the market by a wide margin over a few smaller competitors. Larger potential competitors may find it difficult to first build the technology platform needed to offer Digital River's breadth of products. Therein lies a barrier to entry, but the more significant barrier is the fact that once customers incorporate Digital River's technology, it becomes cost effective to build scale on the existing relationship as opposed to seeking a new vendor. The result is an attrition rate that BancBoston Robertson Stephens estimates at less than 1%, validating the claim that customers are likely to continue outsourcing through Digital River. Secondary Offering A recent secondary offering of 2.2 million shares (including over-allotment and excluding shares sold by insiders) may put some selling pressure on the shares over the near-term. Digital River went public this past August, so a secondary this soon may seem like a bad sign, but I don't necessarily think so. Here's what I belived happened. Last summer, liquidity was not present in the primary and secondary capital markets. Because this was a high profile Internet IPO with strong institutional backing, the bankers wanted to get it through without being overly dilutive. So, here's what the bankers did. Because of weak capital markets, the offering price had to be lowered to $8.50. Instead of having to issue more shares at the low price, they figured that within a few months liquidity would come back into the markets and Digital River's stock price would rise and the rest of the offering could be priced on more favorable terms. In our opinion, this secondary was more like the second half of the IPO. The investment community was probably well aware of this, not punishing the stock on the announcement. The secondary adds more liquidity to Digital River's already solvent balance sheet. I estimate that the company has in excess of $60 million, or more than $3.50 a share, parked on its balance sheet after the offering. Those proceeds will help keep the company debt-free, and give it the financial flexibility that Internet companies so desperately need. So what you have is a company that will be at the forefront of ESD technology, as consumers and e-tailers sell more products on-line. Yet, Digital River is still a small-cap stock with a market cap of $615 million, which isn't easy to find in the Internet sector. And although the valuation isn't cheap it is not as stratospheric as that of Amazon.com (NASDAQ: AMZN). While Digital River trades at 17 times projected 1999 sales, Amazon's market capitalization is 23 times sales projections for this year. Digital River does not yet have the brand name of Amazon.Com, but does have a more sound business model, in my opinion. Digital River is putting the foundation in place to build a dominant franchise within its niche of providing outsourced e-commerce solutions. Bottom Line: My research leads me to believe that the company is on the verge of signing a few more high-profile deals similar to the one inked with Wal-Mart. If that happens the shares will be more than a home run in 1999….they'll be a grand slam.