Bullish article on RNWK from front page of SI
Feb 04, 1999
The One Internet Stock to Buy Now!:
Special Internet Edition
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Everywhere you look there is a major merger in the Internet industry. America
Online bought Netscape in a deal that was valued at $4.2 billion. @Home is
merging with Excite in a deal worth $6.7 billion. Yahoo! announced that they
would merge with GeoCities in a deal worth $4.6 and would cede. This merger
would give Yahoo! a 58% reach of the total Web audience.
In the search for Internet users, larger Internet based companies will continue to
search for and acquire companies that compliment and increase the number of
users to an Internet company. Microsoft continues to make very smart but small
acquisitions of smaller Internet companies with a niche. That list includes
HotMail and LinkExchange.
What is most important right now is that an Internet company must accumulate
as many users as possible. The number of unique users is essential to the
growth of any Internet company. Without users you cannot sell advertisements,
e-tail related products and so on.
Real has more than an 85% share of the streaming media market
One company that is sitting on a gold mine of registered users and accumulates
a large number of new users on a daily basis is RealNetworks (RNWK 72 1/2).
Real is a leader in the streaming media market. It develops and markets
software products designed to enable users of personal computers and other
consumer electronic devices to send and receive audio, video and other
multimedia services using the Web (as taken from their web site). Real has
more than an 85% share of the streaming media market.
What is truly amazing about Real is that they have more than 50 million "unique"
registered users, up from 20 million one year ago. This is not like the McDonald's
sign where it says "Over 99 Billion Served," and only a few billion people on the
planet. These are "unique" users and they are not counted twice. Their software
is downloaded at a rate that exceeds 170,000 times per day.
On October 19, 1998, Netscape and Real announced an agreement to distribute
and include RealNetworks RealPlayer software with Netscape's Internet client
software Netscape Communicator 4.5. Real also has strategic relationships with
Intel, Lotus and Inktomi. Relationships with media companies include; ABC,
CNN, ESPN Broadcast.com and the Wall Street Journal. Real is not shy about
working with large and well known companies.
Having a market cap of $2 billion, their stock is a low risk way of entering
the Internet space
What a large company (primarily an Internet related company) may want from
Real is its large quantity of users. Perhaps before each software download (or
maybe after) a list of questions could come up prior to the use of Real's
software. These questions may include; "Would you like to know more
information about our FREE Internet email address?," "Would you like to
bookmark our search engine?," "Would you like to know more information about
our online bill paying plan?....". Those are just hypothetical questions that could
be asked to people that download Real's software. They could compliment a
large web portal, or media company. A permanent link to a free email address
could be embedded on the front of RealNetworks software. Everytime you use
it, you would see it. Their software is already somewhat like a mini-web browser
with search capabilities and links to access other complimentary sites.
The question is, how much would someone be willing to pay for Real and who
would it be? As noted above, a rather large Internet company would most likely
be an ideal candidate. AOL (they have already acquired Netscape) would be the
most likely candidate. One of their goals is to attract as many users as possible
and they already have a distribution agreement with Real. By acquiring Real,
AOL would be accumulating Internet users which help fuel their growth. The main
thesis is that Real has a very large and growing user base. Their product could
be expanded and complimented with other Internet services. That is why it would
be smart for a company with deep pockets to pick them up while their stock is
still relatively cheap.
As for a buyout or merger, the price Real would fetch, based on other mergers in
the Internet space, would be between $3 billion to $5 billion. BancBoston
Robertson Stephens recently raised 99' revenue estimates from $95 million
to $99 million. Since Real has a history of consistent sequential revenue
gains, exceeding $100 million in revenues should be a rather easy task for them,
I feel. With AOL's recent merger of Netscape, that will further accelerate the
number of people that use Netscape's browser and further accelerate the users
that use Real's software.
With Real having a market cap of $2 billion, their stock is a low risk way of
entering the Internet space. In the event of merger or buyout, their stock could
command, at the high end, close to $200. Their stock is not particularly
overvalued, trading at 20 times 99' revenues. It may seem expensive but it is
really a fair valuation for an Internet stock. They have a brand name that everyone
knows and most Internet surfers use. The shareholders of Real will reap the
rewards of a rock solid Internet company that has their own special niche. Even
without a merger or buyout, their shares should double within the next 18
months, based on a strong brand name and their ability to accumulate registered
users. Keep in mind that their stock is very volatile and can move in spuratic
price swings in both the up and down direction.
Mark Johnson Editor IFC |
