HANG IN THERE!!!!
On-Line Investors Cheer Gains For
RealNetworks
By Carrie Lee
The Wall Street Journal Interactive Edition
NEW YORK (Dow Jones)--When Internet stocks began soaring earlier
this year, it looked like RealNetworks Inc. (RNWK), which popularized
the use of audio and video on the Web, was going to miss the party. Wall
Street was lukewarm on the company, and its shares languished through
much of the market's robust February rally.
But on-line, shareholders never wavered in their enthusiasm for the stock
and voiced confidence that their patience would soon be rewarded. One
post on the alt.invest Internet newsgroup read: "It looks like
[RealNetworks] will continue to dominate and their stock will continue to
prosper." Another post stated, "I believe it will take some time but it will
pay off in the end, RealAudio is going to go where the Internet has never
been."
Now, after watching shares of RealNetworks skyrocket since early March,
investors in on-line stock-discussion groups are basking in the glow of
vindication. "This is almost like being an early investor in 'Ma Bell,' " exulted
one. RealNetworks' stock has more than doubled, reaching a high of 37
last week after trading below 15 on March 2. The company's shares were
down 1 1/2 to 34 1/4 in afternoon trading Monday.
Analysts like the company's prospects, but they are bit more reserved
about its stock price. And lurking in the background is a note of caution,
because RealNetworks must contend with the Internet's 800-pound gorilla,
Microsoft Corp. (MSFT).
RealNetworks pioneered the use of audio on the Internet by developing
software that "streams" sound, a technology that enables users to listen to
audio feeds as they are downloaded to their computers. The company's
RealAudio software has become the dominant technology for broadcasting
sporting events, music and news over the Internet. Its RealVideo software
has been catching on more slowly since streaming video is currently
hampered by the limited speed of most Internet connections.
James Reynolds, an analyst with Wedbush Morgan Securities of Los
Angeles, says RealNetworks is finally benefitting from the "realization that
video ... is going to be an exceedingly important part of the Internet." The
company already has more than 18 million registered users of its
free-streaming software and has a rapidly growing business selling server
software for transmitting audio and video to site operators.
RealNetworks makes most of its revenue licensing its software. Additional
revenue comes from its service components, which provides upgrades for
users, and the sale of advertising on the RealNetworks Web site
(www.real.com).
For the fourth quarter, RealNetworks reported a net loss of $2.6 million, or
nine cents a share, on revenue of $10.3 million. The company posted a loss
of $1.5 million, or five cents a share, on revenue of $5.7 million a year
earlier. For all of 1997, revenue more than doubled to $32.7 million, but
R&D costs tripled to $13.3 million from $4.8 million in 1996, adding to the
company's net losses.
Reynolds said he expects RealNetworks to turn a profit in the fourth
quarter of 1999, and predicts the year 2000 as a whole should be
profitable. But while analysts and investors alike agree that "streaming"
software is becoming an integral part of the Internet, there is no consensus
on whether RealNetworks will eventually succeed in making its brand of
technology a Web standard. Investment ratings on the stock are all over the
board - four analysts currently cover the stock with ratings of "accumulate,"
"long-term attractive," "market outperform," and "hold." Part of the reason
for the wide variety of opinion on the stock is the company's relationship
with Microsoft.
Since early last year, RealNetworks has had a deal with the Redmond,
Wash., software powerhouse that makes them both competitors and
partners. In July, the company sold a nonvoting 10% stake to Microsoft for
$30 million, and licensed technology to the software giant for an additional
$30 million. Microsoft also agreed to bundle RealNetworks' software with
Internet Explorer. But the deal also gave Microsoft the opportunity to clone
RealNetworks' products during the period when they were licensed to the
software giant.
Michael Sullivan-Trainor, program director of Internet research for IDC, a
Framingham, Mass., company that analyzes technology companies, says
that provision set RealNetworks up for a direct challenge to its dominance
on the Web.
Indeed, last month Microsoft unveiled a beta-version upgrade of NetShow,
a competing streaming media technology and potentially devastating
competitor to RealNetworks' RealSystem software. NetShow is available
on Windows NT networking software, and is expected to be featured
prominently in the Windows 98 operating system. The move,
Sullivan-Trainor says, was "classic Microsoft," referring to the company's
controversial strategy of emulating innovative Internet technologies,
integrating them into its operating systems and then giving them away free.
"In terms of new businesses and people deploying Web sites, if they go
with NT and [their plan] includes streaming, the door is closed to
RealNetworks," he says.
"Any area that Microsoft takes seriously is a serious threat," says John F.
Powers, an analyst with BancAmerica Robertson Stephens in San
Francisco. "[But] Microsoft has been in the market with NetShow for some
period of time and RealNetworks has done a nice job of setting the
standard and maintaining market share."
For now, RealNetworks is holding its own. The company has 85% of the
market share for installed Internet media players. Nearly every major
record label and many radio stations use RealAudio to promote new
releases on their Web sites, and companies like Sony and film.com use
RealVideo to play movie clips on the Web.
In February, RealNetworks announced its first acquisition, Vivo Software,
which develops streaming media creation tools, for $16.4 million. And in
April alone, the company announced deals with such media behemoths
ABC Radio, CNN Interactive, and TCI Music, a digital music provider.
RealNetworks also has agreed to a joint venture with MCI
Communications Corp. (MCIC) to create a Web-based broadcast
network. On-line investors remain confident that RealNetworks has the
staying power and brand-name recognition to succeed at competing with
Microsoft's technology.
"When we first started talking about RNWK, who in their right minds
would have thought we would be some of the first to actually own a piece
of American History," a Motley Fool (www.fool.com) board member
posted this week. Another posted, "I know there is a lot of hype and that
this technology is in the infancy stage and a ways off for the mainstream.
But - I think we can all bank on the future being media-on-demand."
Reynolds of Wedbush Morgan Securities, who has an "accumulate" rating
on the stock, says, "analysts tend not to want to pound the table too hard
on [RealNetworks], they like it more in conversation than on paper. If the
market were to tank, Internet stocks could lose 50% of their value in a
week. Valuations are very high, and most Net companies are still showing
small losses."
BancAmerica's Powers agrees. "The ratings caution has to do with the
valuation. These Internet stocks are trading at unprecedented multiples."
But Sullivan-Trainor of IDC says confidence in RealNetworks' products,
and not its status as an Internet stock, seems to be driving its shares higher.
"The stock market really likes the ability to build brands," he says.
When an Internet start-up "can build a brand, that's what gets people
excited." Reynolds says that while Microsoft represents a major risk going
forward, he believes RealNetworks has staying power. RealNetworks "has
got the market presence now, they've got a lot of big Internet users. I don't
think they'll lose that market share quickly." |
