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April 27, 1999

Digital River, Inc. for Mom

by Paul Motter
([email protected])

Trading at $38 3/4 as of April 26, 1999

Happy Mother's Day! Last year was great for us, Mom, because the Internet and networking sectors, my areas of expertise, each had a banner year. This year might be a little different because the shine has faded on certain tech stocks, especially in the PC sector. Some of them just need a good dose of elbow grease, and others really need to clean house.

Well, Mom, the computer stocks are cheap now because there is so much competition. PCs are becoming like television sets, getting better and cheaper every day. But this doesn't mean the stock price of every company related to technology should suffer, too. Just the opposite!

I want to tell you about Digital River Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DRIV)") else Response.Write("(Nasdaq: DRIV)") end if %>, a company that specializes in Electronic Software Distribution (ESD). That's just a fancy way of saying it sells software over the Internet. Think about it -- more and more people are buying computers and going online, and those people need software. Of course, they have the option of driving to the local computer store and walking the aisles to find the shrink-wrapped version of whatever they need, but in the same amount of time they could have downloaded it over the Internet with the convenience of never having to leave home.

It takes time to download larger programs, but there are a whole lot of new options for faster Internet connections available to homes and businesses now. These are called broadband services and they include cable modems, DSL, and wireless Internet access. With a high-speed broadband connection, the time it takes for a program to download is reduced from hours to minutes.

Digital River holds a top position in the electronic software distribution space, along with another competitor by the name of Beyond.com. There is a slight difference between the two companies, however. Digital River specializes in wholesaling its electronic software distribution for other "e-tail" customers, including the websites for Wal-Mart and CompUSA. When a customer at those sites decides to buy a software title, he or she actually receives the product from Digital River.

Beyond.com has a few similar wholesale agreements with software manufacturers, but it mostly sells software through its own online software store where buyers can browse for software titles. Maintaining its own e-tail presence requires maintaining the expensive marketing partnerships it has already established with America Online, Yahoo, and Excite.

It is still early in Digital River's development. It is not yet profitable, but it is steadily improving the bottom line. Its 1998 sales of $20 million represent an increase of 736% over the previous year. Analysts are predicting earnings per share growth of 41% in 2000. For the nine months ended September 1998, sales rose from $1.1 million to $11.5 million. Net loss rose from $2.1 million to $9.3 million.

Granted, neither Beyond.com or Digital River is expected to be profitable until 2001, but Digital River seems to have one thing going for it -- it isn't going to end up competing with itself. There is little doubt that Electronic Software Distribution is going to be big business on the Internet. The question is, "Who are the big e-tail names in software distribution going to be?" Beyond.com will face heavy competition if heavy hitters like Amazon get into the game, as many Internet analysts expect they will. On the other hand, Digital River stands a much better chance of forming alliances with the likes of Amazon and other future e-tailers because it will not be in competition with them.

Digital River already distributes software for several online e-tailers, including Cyberian Outpost, MicroWarehouse, CompUSA, Kmart, Shopping.com, PCZone, and MacZone. It also distributes for various software companies including Connectix, Dragon Systems, and Corel. Its business model is set, and so is a great deal of its infrastructure. It doesn't have the burden of ongoing payments for marketing agreements, so capital can be used for strategic acquisitions. It recently acquired two shareware distributors to give it access to several more titles and end users.

Okay, this stock may be a long shot now, especially since Internet stocks have been riding a roller coaster recently, but the day will come when the vast majority of software is purchased over the Internet, and right now Digital River is the hotshot of wholesale electronic software distribution. I wouldn't put my nest egg in it, but I might think about buying a small number of shares and tucking them away in a safe place.

Digital River Company Information:
Trades on Nasdaq under symbol DRIV
Digital River's website: www.digitalriver.com
Current Quote
Digital River's Chart

Other Related Links:
Digital River's Message Board

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