Digital Insight Capitalizes On E-Banking (DGIN)

| About: Diversity Group (DGIN)

Shares of Digital Insight (OTC:DGIN) are up 10% in the past couple of months. Part of the price appreciation stems from the fact that Jim Cramer (of CNBC's Mad Money) recently recommended the stock. Although the name has suffered from some insider selling (insiders still own 11% of the stock), our overall tone on the company remains intact.

Thesis/Risks
Founded in 1996, the banking solutions outsourcer runs Internet services for close to 2000 banks and 6 million customers. Digital targets an attractive niche: smaller institutions that lack the proprietary wherewithal and resources to handle their client's online needs. Without the financial muscle to carve out their own technological infrastructure, smaller outfits have no choice but to sign up with Digital Insight. We think the business has ample room to grow, even though competition's been heating up. Analysts are already slashing their top line projections, and unforeseen risks -- such as security breaches -- are creeping into play.

Still, as a service enabler, DGIN presents a compelling play on the escalating adoption of e-banking, which we reasonably suspect will continue to grow by leaps and bounds. 39 million households will bank online this year, according to Jupiter Research. That number is expected to hit 57 million by 2009. We believe Digital Insight is well-positioned to capitalize on this growth.

But trends in and of themselves do not guarantee success or long term sustainability. Digital Insight needs to hone in on its cross-promotional endeavors, as well as develop a competitive advantage that will keep rivals -- core processors, in industry jargon-- at arm's length. We forecast a modest drop in revenue growth as rivals storm the castle with lower priced platforms. With negligible debt and $115M in cash stored for a rainy day, Digital Insight's ability to scale and retaliate should not be discounted.

The Bottom Line
As the online banking boom rages on, Digital Insight should continue to ring the register. With the stock trading at half of what its peer group trades at (on a price/cash flow basis), we'd have no problem picking up shares at today's price. We find solace in the fact that of the 12 analysts that track the stock, not one has a sell rating. Basing our assumptions on a relative value comparison, we see the stock hitting $42 before the 4th of July.

DGIN 1-yr Chart