Updated with Tuesday trading activity

NEW YORK ( TheStreet) -- The severe market reaction to Monday's below-consensus outlook from DG FastChannel ( DGIT) may be more a product of overheated expectations than a deeper problem with the Irving, Texas-based provider of digital media services.

" Over the longer term, we remain confident in the company's positioning given apparently intact HD high-definition fundamentals and what we still view as relatively benign competitive dynamics," research firm ThinkEquity told clients in the wake of the news.

Shares of DGFastChannel, whose products and services enable electronic delivery of commercials, syndicated programs, and video news releases, plunged 38.4%, or $9.43, to $15.11 on Monday. They rebounded Tuesday morning, and were up 75 cents, almost 5%, to $15.86.

The session's worst level of $15.02 was a new 52-week low, and a level that shares haven't seen since early March 2009 during the market's worst swoon of the financial crisis. Monday's volume of nearly 26 million was more than 35 times the issue's trailing three-month daily average of around 700,000.

Although the stock's 52-week high of $44.19 came on June 3, it's been a steep decline for DGFastchannel since August 3 when the shares last closed above $40. The next day, the company announced its second-quarter results, which beat Wall Street's expectations handily, but also raised the bar for future performance.

So while Monday's sell-off was ugly, the stock had already been showing some technical weakness, falling in 11 of the prior 14 sessions. It now sits well below both its 50-day and 200-day moving averages of $34.27 and $35.55 respectively.

The comedown since the second-quarter report, when DGFastChannel's profit of 32 cents a share topped the average analysts' estimate of 23 cents by more than 40%, has been fueled by a number of factors, according to ThinkEquity, which remains confident enough to keep its buy rating on the stock intact; although it did cut its 12-month price target by a whopping 50% to $24 from $48.

"While the disappointing guidance for 2H10 (and particularly 3Q10) would appear to support recent concerns surrounding the stock (e.g. investor concerns that HD penetration may be higher or HD pricing may be lower than indicated by management, the potential competitive threat to the core ad delivery business from Ascent Media ( ASCMA - Get Report) or others etc.), we believe these concerns remain unfounded," the firm said.

In its statement announcing the outlook, DGFastChannel said the HD business was "strong" and pricing was "stable."

Oppenheimer & Co. analyst Jason Helfstein, who has an outperform rating on the stock, noted that the company's full-year outlook for EBITDA earnings before interest, taxes, depreciation and amortization of $105 million to $107 million on revenue of between $230 million to $234 million doesn't look so bad when compared to what he was forecasting prior to the second-quarter report.

"Based on our estimates prior to better 2Q results, revised revenue guidance is in line, and EBITDA is 5% ahead," he said in a note.

DGFastChannel attributed the view for third quarter, where it now expects to report revenue of $51 million to $53 million vs. the current Wall Street consensus view of $61 million, to normal seasonality, which it said was masked a bit by the strong second quarter, as well as short-term pressures from the transition of its Pathfire syndication business to a retail model from wholesale. Oppenheimer's Helfstein said this switch should be beneficial in the long run.

"While investors' confidence in management is clearly shaken, as demonstrated by the recent price action, the step should bring some stability to the share price," he said, noting that his earnings estimates and 12-month price target of $50 for the stock are now under review.

Anticipating the market's reaction to the outlook for the second half would be ugly, DGFastChannel's management team tried to cushion the blow by unveiling a $30 million buyback program along with the bad news.

"We believe this share repurchase program is a good use of our cash, reflecting our strong belief in the value and opportunity for DG FastChannel," said Scott Ginsburg, Chairman and CEO, in the press release.

Oppenheimer's Helfstein was cheered a bit by the buyback, and said possible positive catalysts for the stock from here could include any comments at upcoming Fall investor conferences about ad trends for the fourth quarter, and the beginning of the political spending season.

As glum as CEO Ginsburg likely is about Monday's sell-off, there is a slight bright side to the share price action: That $30 million buyback is going to go a lot further now.

-- Written by Michael Baron in New York.

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