Proving the axiom that stock prices look ahead rather than behind, Digital River (NASDAQ:DRIV), the leading e-commerce outsourcing service, reported first-quarter revenues and profits that handily beat analyst estimates but provided second-quarter guidance that fell just short of forecast earnings. As a result, after-hours trading of Digital River's stock sent it down 4%, or almost $2 a share -- something it's done in the past.
While this is obviously a case of "what have you done for me lately," it also validates investing great Benjamin Graham's description of the market as manic. One day it's up; next day it's down. While Mr. Market may look ahead, it's a very shortsighted view. That's why Fools would be well-advised to ignore the daily fluctuations in a stock's price in deciding whether to sell.
When it comes to buying, however, irrational dips in great companies' shares can offer excellent opportunities. When Mr. Market's in a funk about a stock, and he decides to offer you less for your shares, it may be time to start thinking about scooping up more. Look at what he's offering for Digital River.
The company reported first-quarter revenues of $78 million, 43% more than last year and 3% more than the $75.7 million that analysts had been expecting. The online software-delivery and payment-service provider's profits were equally impressive: $16.4 million, or $0.41 a share. That's 17% more than the same period last year, even accounting for stock options that shaved roughly $0.09 off of earnings.
That's a strong enough performance, so why is Mr. Market depressed? Because Digital River said it would earn only $0.37 next quarter, when analysts had forecast $0.38 a share. Even so, the company said that it would continue to turn in strong revenue results, with sales expected to reach $70 million, even though analysts expect only $69.6 million. Apparently, analysts and investors worried because Digital River would be experiencing its normal seasonality -- the second quarter has typically been among its slowest -- and a lower tax rate, even though it still bore an overhang of 4 million shares from a secondary offering.
As a shareholder, that's one of my biggest concerns with the company. Digital River has been fairly acquisitive over the years, devouring 20 companies with shares instead of debt. The company has kept its long-term debt relatively low (only $195 million in convertible senior notes), but it consistently dilutes ownership stakes for current shareholders. Digital River plans to continue using its shares to make acquisitions this year and next.
Even so, the company has been able to assimilate those acquisitions fairly efficiently. In the fourth quarter, it acquired Commerce5, which brought it clients like Hewlett-Packard (NYSE:HPQ) and Gateway (NYSE:GTW), businesses with which Digital River hopes and expects to expand its relationship. It also still has Symantec (NASDAQ:SYMC) as its largest customer, and though Microsoft (NASDAQ:MSFT) competes with that company's virus and security offerings, it's also a Digital River client.
To me, it seems that the after-hours selling looked only so far and no further. It ignored the slight increase in the company's full-year expectations and the lack of meaningful competition on the horizon. Expansion capabilities in Europe and Asia should also fuel Digital River's future growth.
When the market sells off your stock, don't despair. As Warren Buffett suggests, "Be fearful when others are greedy, and greedy when others are fearful." Look and hope for sell-offs in your stocks if their underlying businesses are otherwise sound. That's where you'll be able to sail away with more profits.
Profits from these related Foolish articles:
Microsoft is an Inside Value recommendation. Ready to buy when the market's screaming to sell? Get acquainted with value guru Philip Durell with a free 30-day guest pass.
Fool contributor Rich Duprey owns shares of Digital River but does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
