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Digital River (DRIV) got crushed last week due to a poorly received earnings report. The stock sold off some 25% as its report matched expectations on the bottom line, but was $3mm light on revenues and provided poor guidance. Given the company's long term prospects, fortress balance sheet, new interest from a leading technology private equity firm and low valuations; the shares are offering a great opportunity to pick up Digital River on the cheap.

"Digital River provides end-to-end global cloud-commerce and marketing solutions. The company offers a range of services that enables its customers to establish an online sales channel." (Business description from Yahoo Finance)

Seven reasons DRIV has huge value at $14 a share:

  1. The company has around $290mm in net cash on the books, which represents approximately 60% of the stock's market capitalization.
  2. Vista Equity Partners just filed a 13D indicated it has amassed an over 8% stake in Digital River at higher prices. Vista specializes in adding value to leading software and technology firms. Roper Industries (ROP) announced last week that it acquired privately held Sunquest Information Systems for $1.42B. Vista held a significant stake in Sunquest.
  3. Digital River is one of the cheapest software companies I have come across at just 76% of book value.
  4. DRIV is selling near the bottom of its five year valuation range based on P/B, P/S, P/E and P/CF.
  5. The stock is selling at under 12 times forward earnings, around 5 times if you take out net cash. Through its partnership with Microsoft (MSFT), it should benefit from the Windows 8 upgrade cycle starting in the fourth quarter.
  6. The mean analyst price target by the 10 analysts that cover the stock is $19 a share.
  7. The stock looks like it is forming a long term bottom at this level (See Chart).

(click to enlarge)

Disclosure: I am long DRIV, MSFT.

Source: Private Equity Firm Takes Significant New Stake In This Cheap, Cash Rich Tech Stock