Digital River… you’ve probably heard of them; probably invested in them, until that ugly October day when Symantec, their best customer, stuck their staff into the river and things got bloody. One day later, DRIV is plagued with a -40% drop. I mean, EVERYONE left. Volume was overwhelming, staggering, just vicious. I felt sorry for DRIV. The prudent investor would have bought some shares, since their wasn’t anything fundamentally wrong with DRIV, they just depended too much on one client. Fast forward a year later, and DRIV is forgiven, and we are back at square 2. Let’s take advantage of this right now, because if I don’t make money on this play I will send hailstones and frogs to Minnesota and Bret Farve will break his thumb (DRIV’s headquarters is in Viking nation). Here we go…
What is Digital River and how do they make money? Well, Digital River is a e-commerce company provider. You may have noticed, I’m quite attracted to companies that provide services to a range of other companies. Especially companies that either have little competition or some kind of specialization to acquire a competitive advantage. Remember, ISRG, OPEN? Anyway, DRIV has some good competition, but what I like about them is that they target the digital corner of the e-commerce world. The really concentrate their resources on clients that sell software, gaming, and other electronics. And that makes a lot of sense, since e-commerce and the digital industry move in the same direction almost identical. How many of you have went to Best Buy to check out a consumer electronic, then went home and ordered it online. This is an interesting phenomenum that occurs with digital products, and I refer to it as the digital shopper. What feeds this trend? Well, 1) there’s higher buyer’s remorse for electronic devices because electronics get out of date much faster than non-electronic products (a laptop you bought today is outdated next month, while a chair is always a chair). So, what you have are people who try out products but don’t buy them on the spot. They end up buying them another day, and that usually occurs online after doing so much research on them, and of course, finding cheaper alternatives online.
So DRIV is in a good position here. Instead of competing with the usual e-commerce giants like eBay or Amazon where they will lose, DRIV can concentrate on developing products that fit digital goods and electronics. It’s no wonder their customer base is majorly electronic/tech related: Microsoft, Adobe, Autodesk, Smith Micro, Seagate, Sandisk, Western Digital and THQ. THQ is one of DRIV’s shinning spots on its resume. THQ is a gaming business, and I really don’t mind investing in companies that are associated with video games. The video game industry probably has one of the highest growths to profit margin ratios (haha, I made that ratio up, but why hasn’t anyone used it before). Plus, I’m a believer in the gaming revolution. One day, all games will be available as a digital purchase (bought online), with online connectivity. DRIV’s investing in their own future when they take in clients like THQ and come up with e-commerce solutions specific to gaming content. This will be a big industry, well, bigger. Lol.
So anyway, I’ve thought long about it, and mapped out everything. Now, here’s my strategy:
DRIV trades right at 38, and is trying very hard to get to that 40 spot… the spot where it once was before SYMC left it. That’s going to be a hard spot to break, but I’m confident it will. Just look at the volume in the past year. It’s very thin, showing that DRIV moved up the wall-of-worry, and that’s to be expected since investors wanted to buy the bargain dip, but were afraid DRIV’s other big clients would leave. Since SYMC has left, DRIV has worked very hard to get back to where it was a year ago, and I have to give them props. So, I’m expecting the more buyers to come in if DRIV can get back above 45. Volume will surge if we get there. For now, we still are on the wall of worry, so we’ll play this conservatively by buying far otm puts on DRIV against our longs. I figure, if DRIV tanks on this thin volume ride, it will fall at 1/2 of the SYMC drop, so -20% puts us at right around 30. Displayed are the March puts, which are reasonably cheap .70 bid / .90 ask. That’s real cheap for leverage 🙂
Anyway, let’s hope the damn breaks and the river runs again. DRIV is at a rare tradable spot (it’s rare to see companies have their stock come back to equilibrium after falling hard, and DRIV did this relatively well. For a good example of the price movement potential, check out EGO which tanked after environmental issues, but then filled the gap, then doubled.) You got to give Mr. Ronning props for working over time to get DRIV back on track.
Bought more OPEN and some AFAM yesterday @ 35.20. Will sell AFAM next week .Comments »