Digital River, Inc. (NASDAQ:DRIV)

Beaten down tech stock, good cash position relative to debt, potential buyout target

Digital River, Inc was floating high with valuations that made it very susceptible to a fall off the wall. Market sentiment may still allow a high flyer to exist here and there, but they'd better produce and never, ever, ever, guide down!

Digital River, Inc still appears to be valued slightly higher than it's metrics indicate it should, but some software company's can manage this. Usually I like to wait a day or two for the dust to settle on a 20% sell off on earnings/outlook, but Digital River, Inc is a fairly low float company and has had several of these drop and rise again cycles this year. If the pattern repeats, then it won't be long until it starts drifting back up and getting ready for the next cycle, so I'll be watching this one before next quarter if I hold it that long. Another point in their favor is that they have sufficient business and margins that they would be of interest to bigger fish. While I never use an arbitrage buyout possibility as part of an investment thesis others do, adding to the support.

Profits were not far out of line, but Digital River did guide down, which is a huge no-no on a high flyer. Even with the lower guidance we are still looking at the mid-teens for a P/E which is definitely in range. There is some safety and some concern that Digital River relies heavily on several key customers, primarily Microsoft. Overall at a near 52 week low, 2X cash to debt ($17 per share in cash), and decent cash flow, I'm willing to take a chance on them at $18.50 and will attempt to "play the cycle".

Cycles are eventually broken, especially investment cycles, and the economy could falter when investors wake up from their dream state and brokerages book their end of October gains.

Goal: If it bounces/trends upward, I'll set a trailing stop and try to walk it up. If I don't get stopped out I'll reevaluate before next quarter's earnings and either close before or close my stop in case of a gap down and repeat....if I remember........