|Shares Out. (in M):||35||P/E||0.0x||0.0x|
|Market Cap (in $M):||585||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-389||EBIT||0||0|
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Digital River Inc. (Nasdaq: DRIV) represents a contrarian opportunity to invest in a leading e-commerce and fast-growing payments company at a significantly discounted price, with the opportunity for an event catalyst through a possible take-private transaction by the company’s largest shareholder, Vista Equity Partners, a $6 billion private equity firm focused on software and technology companies, or numerous other financial or strategic buyers. In the last week of April, Vista increased its ownership position to 9.9% of shares outstanding (weighted average purchase price of $16.28).
DRIV is a widely disliked name by both the sellside and buyside, as the stock has fallen from $37 in Q2 2011 and sits at $16.58 today, driven by poor execution by the prior CEO, loss of several customers including Kodak via bankruptcy. That said, the business has stabilized, 2013 revenue is guided to grow low to mid-single digits and payments revenues (est. ~15% of run-rate revenues) are growing organically at a 60%+ rate. Further, owing to DRIV’s inordinately large cash balance, the stock screens poorly on a P/E basis, which tends to be the primary (if not sole) focus of sellside analysts.
In summary, we believe the company is misunderstood and unappreciated, causing the stock to trade at a significant discount to its private market value. We believe shares of DRIV are currently worth $20 to $28 on a standalone basis using current metrics, and $23-$30 in a sale to a strategic buyer (eliminating corporate overhead), with upside to these numbers as management executes, the payments business expands and non-core business units are sold. Currently, shares trade at only 4.8x consensus 2014 EBITDA and 0.7x revenues (*using our conservatively estimated “Adjusted TEV” which assumes $100mm of “permanent cash” to account for the structurally negative NWC nature of the business). There is also real lottery ticket potential in the payments business, which if it were to continue to grow at its current 60%+ organic rate could be worth more than 2x DRIV’s current Adjusted TEV based on precedent transactions.
Valuation, Segment Estimates and Sum-of-the-Parts analysis:
Keys to the thesis are as follows:
Keys risks to the thesis include:
Business Overview (via Capital IQ)
Digital River, Inc. provides end-to-end cloud-commerce, payments, and marketing solutions to various companies in the United States, Europe, and the Asia Pacific. Its solution combines a cloud-commerce technology platform and a suite of services to help businesses to avoid running an integrated global commerce operation in-house. The company offers an e-commerce solution that operates as part of a client's website. Its services include design, development, and hosting of online stores and shopping carts; store merchandising and optimization; order management; denied parties screening; export controls and management; tax compliance and management; fraud management; digital product delivery through download; physical product fulfillment; subscription management; online marketing, including e-mail marketing; management of affiliate programs; paid search programs; payment processing services; Website optimization; Web analytics and reporting; and CD production and delivery services. The company also provides paid search advertising, search engine optimization, affiliate marketing, store optimization, multi-variant testing, web analytic, and e-mail optimization services; and a range of payment processing services, such as multiple payment methods, fraud management, tax management, cloud-based billing, and other payment optimization services. It serves software, consumer electronics, and computer and video game product manufacturers; and online channel partners, including retailers. The company sells its products and services to consumers through the Internet, as well as through direct sales force. Digital River, Inc. was founded in 1994 and is headquartered in Minnetonka, Minnesota.
Disclaimer: The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice. The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates. No representation or warranty is made as to the accuracy of the data or opinions contained herein.
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