Doesn't matter what "it" is. If you can sell it online, there's a good chance that Digital River (NASDAQ:DRIV) is helping to process the transaction. After close of market tomorrow, the e-commerce outsourcee reports its Q4 and full-year 2005 earnings.

Wall Street Wisdom:

  • General consensus. Ten analysts follow this company, splitting their views straight down the middle: five "buys," five "holds."
  • Revenues. The consensus of analysts polled suggests that tomorrow Digital River will report booking 19% more sales in Q4 2005 than it did one year ago -- $57.2 million in all.
  • Earnings. Analysts don't expect this to result in increased profits, however. They're looking for Digital River's net earnings to decline to $0.31 per share for the quarter. (Interestingly, even this number is $0.02 more than the company itself predicted three months ago.)

Margin watch:
Digital River's profits are a thing of beauty. The gross rises inexorably as time goes by. Operating margins are up nearly 50% over the past 18 months. And the average net is coming in 340 basis points higher, at last report, than it was a year and a half ago.

Margins%

6/04

9/04

12/04

3/05

6/05

9/05

Gross

85.9

85.9

86.9

87.5

88.1

88.8

Op.

20.1

20.7

22.4

25.4

27.2

29.1

Net

20.5

21.1

22.9

23.6

23.4

23.9
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Options watch:
There was a time when I looked seriously at investing in Digital River, but after dipping my toe in the water, I immediately jumped out again, shocked at the company's egregious stock dilution (the share count had amounted to 80% growth in four years). Now I see that dilution has moderated to about 4.5% per annum in recent quarters. That's still not ideal, but it's good enough for a Fool to grin and bear it.

Valuation metrics:
Good enough, especially when you consider just how truly cheap Digital River's stock is looking today. Sure, a P/E of 27 isn't what you'd ordinarily call "cheap." But that P/E is predicated upon accounting profits, which vastly understate this company's actual cash profitability. With a price-to-free cash flow ratio of just 15, and analysts projecting 20% earnings growth for the foreseeable future, Digital River looks to be worth another dip.

Fool contributor Rich Smith does not own shares of Digital River.