For all the talk of Bubble 2.0, the Internet has investment characteristics that investors normally have to wait decades to see: phenomenal growth in front of it, and deep-value characteristics. When is a company a deep value?
A great balance sheet: Cash on the books and no debt, so that you know there is zero chance the company will have financial troubles anytime soon. Strong cash flow: Hypothetically, if a company has a market capitalization of $100 million and earnings of $10 million, that's a 10% earnings yield. Compare that earnings yield with other comparable investments (for instance, a Treasury bill at 4%) and you can determine which is the better investment. Part of the calculation involves determining if those cash flows are stable. Will the company consistently earn 10%? If the company is growing, then you've got the best of every world -- it's like a bond, where the coupon is actually increasing over time. Right now, there are several deep-value plays in the Internet world; I've written about some of them in my Internet Review newsletter.
And in case we were worried about its customer base, paying subscribers grew in the third quarter to 1.3 million, up from 625,000 in the third quarter of 2004. Does the company believe that its shares are a good value? RealNetworks, which is a member of the Internet Review's model portfolio, announced last quarter that it will be buying back up to $75 million worth of stock. It's already bought back $30 million worth, leaving another $45 million to go. I think the downside here is that the stock could fall to about $7 per share. I think upside is $9-$9.50 per share.