Notable Calls

Credit Suisse is upgrading Digital River (NASDAQ:DRIV) to Outperform from Neutral with a $44 price target (prev. $37.50).

Firm notes that with reaccelerating year-over-year revenue growth forecasted for the second half of 2009 and 2010 and EPS reacceleration beginning in the December 2009 quarter, combined with potential upside to near-term consensus estimates for the September quarter, they view the risk/reward of Digital River’s stock as attractive. Because of these near-term drivers, as well as their positive thesis regarding the company’s long-term growth opportunity as an On Demand e-commerce platform provider, they are upgrading Digital River from Neutral to Outperform.


Catalysts: For the September quarter, Digital River has guided to a 1.0% sequential increase in revenue at the midpoint, which is below average seasonal growth of 7.3% and management’s historical guidance of 3.2% sequential growth. Management suggested that the September quarter guidance was based on conservative assumptions for both the typical uplift from the back-to-school season and the annual product launch period of several of its customers experienced in September. Based on the on-time launch of Norton 2010, as well as both CSFB's checks and their analysis of retail sales data (suggesting that some back-to-school uplift has occurred), the firm believes that Digital River is well positioned to show upside to conservative guidance and consensus estimates for the September quarter.

Revenue & EPS Growth Drives Digital River’s Stock Performance
While potential upside to near-term estimates represents a significant driver for CSFB's raised rating, Digital River’s stock price performance often closely tracks the acceleration and deceleration of revenue and earnings growth. When they downgraded Digital River in September 2008, they were concerned that consumer software spending in the United States had slowed after a traditional boost to sales at the end of August and early September from back-to-school. Presently, however, CSFB's model forecasts a year-over-year reacceleration in revenue and EPS growth. Given that Digital River’s stock price has historically performed better in periods of high or accelerating growth—particularly EPS growth— they believe that Digital River’s current stock price represents an attractive entry point.

With two quarters of reaccelerating year-over-year revenue growth in the second half of 2009 and EPS reacceleration beginning in the December 2009 quarter, combined with potential upside to consensus estimates and current relative valuation multiples below historical ranges, CSFB views the risk/reward of the stock at current levels as attractive. Furthermore, their confidence in their above consensus estimates that imply a reacceleration in revenue and EPS growth has been boosted by the on-time launch of Norton 2010, as well as both checks and analysis of retail sales data (suggesting that a somewhat normal back-to-school uplift occurred in August). As such, they believe that Digital River is well positioned to show upside to conservative guidance and consensus estimates.

Notablecalls: I like this call as:

- DRIV is a mover stock.

- CSFB has a pretty good track record covering DRIV

- The call makes sense (historical analysis & checks). CSFB is calling for better than expected results.

- DRIV, while not a direct comp to Omniture (OMTR), has long been rumored a takeover candidate.

- The stock has lagged the market.

All in all, I think DRIV will trade above te $37 level today and I would not rule out $37.50- $38.00 if the market continues to cooperate.