RealTime IT News

Market Overreaction Creates Real Bargain

Apparently it took Friday's dip below the $20 mark for investors to notice that RealNetworks represents a strong buying opportunity, as shares jumped more than 10% in early trading Monday.

But shares of the online streaming media software market leader, which traded as high as $96 just eight months ago, have been moving deeper into bargain territory for weeks.

Last week alone, RNWK lost 35% of its value. And Friday's closing price of $21.19 represents a 59% drop from Sept. 5, when shares finished at $52.

Accelerating RealNetworks' ticker descent heading into the weekend were continued market concerns about a drop in online advertising spending, a fear that also has dragged down shares of companies such as Web portal Yahoo! and ad services provider DoubleClick .

While it's entirely reasonable for investors to be cautious, or even skeptical, about companies that are primarily dependent on ad revenues, RealNetworks doesn't even come close to fitting into that category. RNWK makes most of its money through the sale of its streaming media software, a market it dominates with a share of more than 80%.

Yes, the company has been aggressively developing other revenue streams, such as monthly subscription fees for users who want to download music, video and other Web content. And while online advertising is a growing part of RealNetworks' business, it only comprised 19% of revenues in Q2, up from 15% in the first quarter.

We'll know whether that figure continues to rise after the market closes Tuesday, when RNWK is slated to release third-quarter results. Consensus estimates call for a net profit of 4 cents per share.

With a market capitalization of $3.3 billion through Friday, RNWK now carries a valuation of 17x trailing 12 months' revenue of $194.5 million. That compares to its valuation of 83x TTM revenues at the beginning of this year.

Should Q3 revenues reach $75 million - only about 20% over Q2's $62.7 million - RNWK's valuation falls to an even more attractive 14x TTM revenues. And that's at Friday's closing price. Given the market's bearish reaction to Q3 numbers, RealNetworks could reach a new 52-week low if it doesn't shatter street forecasts.

And then we should really see bargain hunters streaming toward RNWK shares.