The market tends to look forward when pricing companies, rather than gazing into the rearview mirror of reported results. For example, e-commerce provider Digital River
For the third quarter of 2005, Digital River reported $53 million in revenues, up 35% over last year. GAAP earnings were up 41% to $0.31 per share. On a pro forma basis, Digital River's earnings were up 72% from last year. While the company recorded some depreciation and tax benefits that boosted results a bit this quarter, it also said its overseas expansion was growing and expressed hope that it will one day surpass 60% of total revenues. The company also forecast that the fourth quarter would match expectations: Full-year revenues would be $216 million, a 40% increase over 2004's results.
Those were outstanding numbers, indeed, and if the market simply looked at how companies did in the past, Digital River's stock would undoubtedly have soared 19% rather than falling by that amount. But management sounded a cautionary note regarding 2006, and the market reacted accordingly -- or overreacted.
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For me, the after-hours sell-off was overwrought. Although analysts were contemplating earnings of $2.39 a share on revenues of $260 million next year, Digital River's lower guidance of $1.44 per share simply reflects management's conservative nature. For example, when the company gave 2005 guidance back in the third quarter of 2004, it anticipated revenues of only $188 million for the year. Digital River will exceed those estimates by 15% should 2005 play out as anticipated. To my thinking, that's a sign of responsible leadership: under-promise, over-deliver.
With the market continuing to punish Digital River during regular trading hours and the stock being offered below $28 a share, I view this as an exceptional opportunity to scoop up more shares, as might the company. It has an authorized share-buyback program of up to $50 million, of which only $3 million was exercised in the second quarter; it did not buy back any shares in the third quarter.
While the market may be looking ahead in pricing Digital River today, I'm looking even further ahead, and I see clear sailing for this leading e-commerce provider.
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