Deutsche Bank Upgrades Digital River to Buy

Deutsche Bank analyst Jeetil Patel upgraded the shares of Digital River (DRIV) to buy from hold and set a $30 12-month price target on the stock, up from $20 previously.

The analyst states that business trends have been improving in 1Q and future prospects look healthy. In addition, he believes that the company is looking to diversify revenues via the consumer electronics industry, which is facing a shrinking retail distribution channel, shift to direct Web distribution and growing costs in managing e-commerce internally. He thinks that CE wins and potential acquisitions could help diversify revenues for Digital River in 2009.

The analyst raised his 1Q09 revenue estimate to $99 million and EPS to $0.51 from $97.5 million and $0.49 previously. For 2009, his estimates increased to revenues/EPS of $408.5/$2.05, vs. $405.5mn/$2.00 previously.

The price target is based on 15x '09E EPS, in-line with his e-commerce peer group (at 15x '09E EPS). The price target is also reflects 8x 2009E EBITDA of $116mn, also in-line than with the group average of 8x EBITDA. He believes that multiple expansion exists if the company is able to develop a 10% customer or vertical. Investment risks include: Symantec concentration, anti-virus pricing pressure, commission pressure, e-commerce slow down and client retention.

Jeetil states that with Symantec revenue declines largely factored into financials (and the share price), Digital River could begin to benefit from consumer electronics companies looking to outsource e-commerce to dedicated outsourcing partners (like Digital River), much in the same way that software companies outsourced post the Internet bubble. While the CE and games verticals could account for 10% of revenues by year-end, he notes that the company may also look to diversify revenues through acquisitions of companies focused on Asia or the CE vertical. In the near-term, he highlights that 1Q business trends have been healthy, yet the potential for software customer contracts (and potentially application stores for mobile vendors) could lead to revenue and earnings upside in coming quarters.