Digital Generation Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Digital Generation (Nasdaq: DGIT  ) fell nearly 15% in early trading on higher than average volume after reporting a surprisingly large third-quarter loss.

So what: Last quarter, investors sold when revenue came in well short of Wall Street's target. This time, DG's $0.15 per share loss came up well short of the $0.05 a share profit analysts were expecting. Wall Street's target also appears to have accounted for the summer's purchases of MediaMind and EyeWonder, the costs of which cut into earnings.

Now what: I'd love to tell you that sell-off makes DG cheap, but today's action puts the stock right back where it was three months ago: trading for half analysts' long-term earnings growth projections. If only we could trust their guesses. After consecutive misses, I don't see the logic in doing so. Do you agree? Or would you buy shares of Digital Generation at current prices? Please weigh in using the comments box below.

Interested in more information about Digital Generation? Add it to your watchlist by clicking here.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

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Read/Post Comments (7) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2011, at 4:07 PM, ab1387 wrote:

    Did you even READ the financials?????

    This is one of Motley Fool's new lows. This company reported a fantastic quarter ex the one time charges on two acquisitions. Its growth is phenominal and will only accelerate as ad spend increases in 2012.

    The drop is any number of things - this is a very thinly traded small cap stock on a day where we had a near 400 point drop on the Dow, upped volatility, and Italy taking us all down. It seems you merely read a headline and nothing else.

    This is truly one of the worst things I have ever seen on MF, and that is saying a lot. Completely irresponsible and completely lacking in aforethought.

  • Report this Comment On November 09, 2011, at 8:41 PM, TMFMileHigh wrote:

    @ab1387,

    >>The drop is any number of things - this is a very thinly traded small cap stock on a day where we had a near 400 point drop on the Dow, upped volatility, and Italy taking us all down. It seems you merely read a headline and nothing else.

    Allow me Seth Meyers response here: really? Coming up $0.20 a share short of estimates had nothing to with it? Really?

    DG's acquisition-fueled growth on the top line is, indeed, impressive but lets also remember that the company will have to grow revenue by roughly 54% year over year in Q4 just to *meet* the bottom end of sales guidance. Here's the math:

    * $330 mil in FY guidance - $216 in revenue for first nine mos of the year = 114

    * $114 mil / $73.8 mil in revenue in last year's Q4 = 54.5%

    DG expects accelerating sequential growth heading into Q4 so it stands to reason that Q3's 52% YOY sales clip will run higher and meet estimates per the math above, but it would also be folly pretend this is somehow a slam dunk.

    Thanks for writing and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On November 09, 2011, at 11:34 PM, ab1387 wrote:

    Seth,

    Please provide your sources for this statement:

    "Wall Street's target also appears to have accounted for the summer's purchases of MediaMind and EyeWonder, the costs of which cut into earnings."

    In other words, please provide the name of each analyst to which this refers and the date of the figures. As to the "20 cent miss" - you are correct IF the 5 cent estimate (average) somehow calculated those two acquisitions which closed separately. Maybe so - just show us where you came up with that conclusion.

    Yes - I will acknowledge that 54% YOY growth next time will be tough, but look at the top line growth the company had this time and its historical growth for the upcoming quarter.

    This biggest concern to me is not hitting that target -- it is the growing competition, a new CEO, and manipulation of the share price by the MMs.

    My biggest beef is that the article is titled "what you need to know" and then it proceeds to really conclude the stock is not a buy/cheap/whatever from allegedly missing in two consecutive quarters. I guess you win if you show me that the analysts pegged 5 cents as factoring MediaMind and Eyewonder - please provide that to us.

    Just last quarter, however, after the MediaMind deal, this stock was a "bargain by [your] math" and now, after a 52% YOY rev growth and 18% EBITDA growth, you question it?

    I owned shares before today averaged at about 18 1/2; I added 10% of the position in purchases today; if Italy erodes further taking the stock with it, I will add again. Call me crazy and I may lose, but the stock seems plain cheap at today's levels.

  • Report this Comment On November 10, 2011, at 1:17 PM, dockofthebay wrote:

    Whether it is with acquisition costs included or without them included, DGIT missed the analyst's earnings expectations again. Investor confidence in the company's ability to make the Street numbers is shot. Remember also that, according to Bloomberg Financial News, the company was trying to sell itself to a private equity firm back in June. That effort, if it actually took place, failed. I have to wonder if DGIT saw trouble coming back at that time.

    I don't have real money invested in DGIT and I would wait to see next quarter's results before I would consider any investment.

  • Report this Comment On November 10, 2011, at 3:20 PM, TMFMileHigh wrote:

    @ab1387

    >>In other words, please provide the name of each analyst to which this refers and the date of the figures. As to the "20 cent miss" - you are correct IF the 5 cent estimate (average) somehow calculated those two acquisitions which closed separately. Maybe so - just show us where you came up with that conclusion.

    We don't know this because it isn't available. Fortunately, it doesn't matter.

    DG reported non-GAAP earnings of $0.69 a share versus $0.45 a share in last year's Q3. Neither figure is within spitting distance of the estimates reported by Yahoo! Finance. Only the GAAP figures get close.

    We also know from management statements that the MediaMind and EyeWonder deals were closed by Sept. 1 and therefore included in the quarter's GAAP results.

    To be more specific, analyst estimates ranged from a $0.03 per share loss to a $0.09 per share gain with the consensus of the five surveyed settling around a $0.05 per share profit: http://finance.yahoo.com/q/ae?s=DGIT+Analyst+Estimates

    Capital IQ's survey of seven analysts had GAAP profits coming at $0.21 a share. In both cases, the the GAAP figures compare to the $0.15 per share loss reported by DG.

    The lone difference is in normalized earnings, where the same seven analysts were calling for $0.42 a share of normalized earnings versus the $0.69 DG booked.

    So while there is an argument to be made that DG outperformed on a pro forma basis, there were quite a few expecting much more on a GAAP basis. I still believe that's the primary reason for yesterday's selloff.

    Thanks for writing and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On November 10, 2011, at 7:26 PM, ab1387 wrote:

    Tim,

    I capitulate.....I am trying to justify in my mind why I am still with the company after they have done. This is a dangerous attitude after today I am sitting on a 15% loss in this trash. What is really galling and what you should have mentioned - the crooks missed by so much yet gave themselves ridiculous bonuses. Asking for a lawsuit.

    My angst aside - I think the company turns it around long term. I may be wrong. Yesterday's selling is on the quarter and - I think - much of today's comes after shares were locked up from the name change.

    I still want to believe in the company but patience is leaving me. That is especially so with the stock's volatility.

    If you write on it again - look into the company putting itself up for sale, if you will. That is intriguing to me and I am hoping the lack of a sale thus far is not foreboding....but we may have just seen why.

    Still long.....

  • Report this Comment On November 11, 2011, at 2:04 PM, jlnowling wrote:

    Tim,

    Wouldn't you think this company is smarter then were thinking they are? The fourth quarter is always the biggest for DGIT, third is up or down. Next year is the biggest year (every four) in advertising. They know the competition is going to be tough, so DGIT does what they know is best and buys companies that give them the edge. What would you do? They do not like the stock price being low. I think they did what they had to do. I think they want to keep their job. Not every quarter is a blow out. Seth crack open the balance sheet, tell us what you see.

    Chin up, these are tough times

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