Behind the "Buy" Button

05/06/2005 12:00 am EST

Focus:

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

At The Forbes Growth Investor, editor Vahan Janjigian uses a quantitative system to find potential top performers. His latest featured stock, a holding in his Aggressive Growth portfolio, is what he calls "the company behind the buy button."

"Digital River (DRIV NASDAQ) provides services such as Web development and hosting, order management, payment processing, fraud detection, and physical or digital fulfillment. It also enables clients to feature, promote, up-sell and cross-sell targeted products and services. The company has more than 40,000 client contracts, including software and digital products publishers, manufacturers, online retailers, and online channel partners. It boasts an impressive client list, which includes eBay, Autodesk, CompUSA, H&R Block, McAfee, and Microsoft.

"Acquisitions have fueled the company’s growth. In 2004, DRIV acquired Element 5 AG (a European e-commerce solution provider for software publishers), Fireclick (a provider of Web-analysis solutions for online retailers), and BlueHornet Networks (a provider of e-mail marketing campaign management services and customer relationship management tools). Revenues in the fourth quarter jumped 77% year-over-year to $48 million. Strategic marketing and search engine affiliate programs were largely responsible for this surge. The gross profit margin improved 351 basis points to 88.72%, helped by DRIV’s relatively fixed cost structure. Net income surged 129% to $12.8 million or 33 cents per share.

"We note that risks include the entry of competitors into the markets that the company serves. For example, Microsoft’s recent entry into the anti-virus market could usurp business from DRIV because it derives revenues from clients in this market. Indeed, 27% of DRIV’s 2004 revenues were from Symantec Corp., an anti-virus software maker. Furthermore, Internet Service Providers that use spam-blocking software could prevent the legitimate delivery of DRIV’s digital products. Nevertheless, we believe that the company's prospects are good. e-commerce growth rates should exceed 20% per year and customers are quickly switching from physical to digital delivery of products to end-users."

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