Digital River's Q1 2005 Results

Last Wednesday (4/27) Digital River (DRIV) posted excellent results for Q1: revenue increased 70.8% YoY from $31.9M to $54.5M and net income increased 84.2% YoY from $7.6M to $14M ($0.35 per diluted share). For Q2 2005 management sees $49M in revenues and earnings of $0.19 per diluted share, reflecting the company's first fully-taxed quarter. For FY 2005 management sees $209M in revenues and $1.02 in diluted net income per share.

Despite this stellar earnings announcement the stock slid more than 10% over the ensuing few days, presumably in anticipation of the impact taxes will have on the company's bottom line. Though the stock has since partially recovered from this slide it is still down 37% from its 52-week high as of today's close.

In my opinion DRIV should be looked at at current levels. I like the company because it has high margins, a scalable business model with relatively strong barriers to entry (barriers to entry include switching costs, product differentiation, and economies of scale), and a leadership position in e-commerce outsourcing, a rapidly growing sector. Fundamentally, Digital River's balance sheet is strong with $315M of cash and investments. The company is trading at a forward enterprise value/earnings multiple of ~23 for FY 2005 and sports a trailing PEG of ~0.3.

Full disclosure: I own shares of Digital River.

The opinions expressed in this blog are my personal opinions. I am in no way responsible for trades made or not made because of something read here. One should always do his or her own due diligence before buying a stock.