RNWK--The RealNetworks Thing
Kevin Prigel
Jul 19 2000
Looking for the next Microsoft? It might be a company eagerly doing battle with the monopolistic giant: RealNetworks [RNWK]. The most recent quarterly results from Real compel me to hold onto the company’s stock for the foreseeable future. The financials below tell an amazing story: Real managed to grow revenues by almost 120 percent, inflate gross margins by almost 130 percent, and send 17 percent of revenues to the bottom line. This feat was accomplished while dropping 21 percent of revenues into research and development and 43 percent into sales and marketing.
Looking at the trends in expenses compared with revenues, the direction of Real’s financial model looks to be headed on a collision course with Microsoft. Although it is relatively improbable to believe that Real’s revenues will reach the size of Microsoft’s, it appears Real has the capability to achieve the 40 percent plus net margins that have made Microsoft a market phenomenon. These margins, combined with revenue growth still reaching into the triple digits, will continue to drive investor enthusiasm for RealNetworks.
A few cautionary notes for the RealNetworks investor. First, keep an eye on a diluted share count that has soared 26 percent over the past year. Although a good portion of this can be accounted for by acquisitions, a soaring share count means lower earnings for shareholders (and a lower stock price). Next, always keep in mind that this company is competing with Microsoft, a company that has managed to defeat virtually every other competitor, with the exception of Intuit. The government might become the ultimate savior for Real, but the real key to winning is assuring that Real continues to have more market share than all of its competitors combined.
Finally, looking at my five-year model for RealNetworks, the stock can look pricey. Some may consider my estimates for 40 percent margins and 50 percent revenue growth, which are the basis for my buy rating, ridiculous. I consider them just another piece of the puzzle it will take to replicate the Microsoft financial model. |
