Yahoo!-broadcast.com Deal Sends RealNetworks Soaring Still Higher

The streaming-media stock has more than quintupled since early January, and analysts expect even more gains.
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SAN FRANCISCO -- If RealNetworks (RNWK) - Get Report had a theme song this year, it would probably be Sly and the Family Stone'sLet Me Take You Higher.

Since Jan. 4, when the stock languished at a now measly-looking 38, it has more than quintupled to 195 7/16 at Tuesday's close. But investors and analysts are wondering: How much higher can it go? And closely tied to that question is another chin-scratcher: What's the company really worth?

Donaldson Lufkin & Jenrette

analyst Jamie Kiggen took a stab at both questions Tuesday, helping to send the stock 27% higher. Kiggen issued a research note arguing that RealNetworks is undervalued, using as a benchmark the proposed merger of

Yahoo!

(YHOO)

and

broadcast.com

(BCST)

.

In the note, Kiggen initiated coverage of RealNetworks with a buy rating and a $250 price target. He also stressed that "RealNetworks trades at a significant discount to its peers" based on a ratio of market capitalization to gross profit. Based on Monday's closing prices, RealNetworks' ratio of 64 is 58% lower than broadcast.com's acquisition multiple of 150, says Keegan. (DLJ has no underwriting relationship with RealNetworks.)

Since the Yahoo!-broadcast.com deal was announced Thursday, RealNetworks' stock has rallied 60%. That has pushed its market cap from $4 billion to $6.45 billion as of Tuesday's close, catapulting the company over the $5.7 billion price tag put on broadcast.com.

Despite this run, some analysts think there is even more short-term upside. David Readerman, an analyst with

Thomas Weisel Partners

, is one of them. "On my calls with institutional accounts there's a tremendous interest on the part of investors to increase their participation in franchise Net names," says Readerman. "My recommendation to investors is get in." (Thomas Weisel has no underwriting relationship with RealNetworks.)

Although interest in high-bandwidth Internet connectivity and media existed prior to the Yahoo! deal, Readerman says the acquisition was a "very strong endorsement" of streaming media. Readerman is particularly keen on RealNetworks' ability to leverage its growing base of users into an advertising revenue stream. At the end of last year, RealNetworks said that 50 million registered users had downloaded its flagship

RealPlayer

product, with new users growing more than 300% in 1998. That number is surely higher this year, as the company estimates that 175,000 copies of RealPlayer are downloaded every day.

Readerman figures that each copy of RealPlayer on a PC was worth around $85 before the Yahoo! deal broke. Assuming a base of 55 million players, that puts the value of the company at $4.7 billion. But Readerman thinks the figure could go higher. "I think it can move to $125 to $150 per user," he says. That would peg the market cap in the neighborhood of $6.9 billion to $8.3 billion, suggesting room for further upward movement in the stock in the $200 to $250 range.

Rob Martin, an analyst with

Friedman Billings & Ramsey

, is also bullish on RealNetworks. Martin, who has a buy rating and $200 price target on the company, says his current revenue estimate of $98.4 million in fiscal 1999 implies just $5.2 million in advertising revenue, with the remaining $93.2 million coming from software licensing revenue. Real's value as a advertising and commerce-driven media platform, says Martin, far exceeds its core software licensing opportunity.

"I would guess the

price would be farther north than where it is now," says Martin, whose firm has no underwriting relationship with Real. RealNetworks CEO Rob Glaser "thinks he has the potential to be the next media franchise on the Net."

Then again, analysts are quick to caution investors about the risk of betting on a company that's competing with

Microsoft

(MSFT) - Get Report

. RealNetworks has been able to hold on to its 85% market share in the streaming media market, but maintaining that reach is a day-to-day battle. In its new Web browser,

Internet Explorer 5.0

, Microsoft is promoting its NetShow Media Player.

"It's very difficult to invest in the line of Microsoft's fire," says Readerman. "The industry is littered with examples of failures due to Microsoft. This is not risk-free."