January 26, 2011 | In: Services

DG FastChannel Inc. (DGIT) – A Takeover Candidate?

I have previously written about DGIT, when it was way undervalued, and trading at around $15.

Fast forward 4 months to today, and the stock is now trading at $28, that’s around 90% gain if you bought the stock back in September.

Take a look at the six month chart of the stock:

DGIT 6 month chart (courtesy of Google Finance)

Now let’s examine the chart to see if the stock still has room to grow. The stock has reached an all time high of $42 back in June of 2010, which means that it is probably heading this way, and at least for the next couple of months, the stock will preserve its bullish trend.

However, if in the next guidance, DG FastChannel Inc. says that the churn rate is increasing, or they’re having trouble acquiring new customers, or the cost of acquiring new customers has increased, or the competition is becoming fiercer, then expect the stock to lose at least half of its price in a month’s time. The problem with this industry is that it’s very volatile, lucrative, but volatile. Customers are demanding (and often cheap) and competition is also merciless.

Now if you’re a very optimistic investor, then take a look at the market capitalization of DG FastChannel, it is currently at $770 million, that’s cheap, if a company wants to buy it. Now who’s going to buy it, which large company has a business that will benefit from buying DG FastChannel. There are 3 that I can think of, at the top of my head:

Netflix (NFLX): Netflix could hugely benefit from this deal, as it will grow its streaming empire. Netflix has a market capitalization of $9.54 billion (currently the stock is trading at $182.70).

Google (GOOG): With a market capitalization of almost $200 billion, Google can swallow DG FastChannel much easier than Netflix, without a single hiccup. Not only Google can afford this company, it needs this company. Why? They have Google TV!

Apple (AAPL): Buying this company is even cheaper for Apple (Apple has a market capitalization of $316 billion). Apple also will benefit from this deal, as it has the Apple TV.

Google and Apple are sitting both on mountains of cash money to afford this deal. For Netflix, it’s a different story. The company will probably not sell for less than $2 billion, which is over 20% of Netflix market capitalization (at its current inflated P/E 68). If Netflix buys DGIT, then it’ll be the end of it. Google and Apple are the best (and realistic) potential buyers.

Note that Microsoft may also be interested, and Sony as well (however, Sony is now heavily marketing Netflix, and has an alliance with Google when it comes to TV streaming).

It’ll be interesting to see what will happen to DG FastChannel by the end of this year…

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