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RealNetworks shares halved, analysts mixed

RealNetworks (Nasdaq: RNWK) plunged Thursday after its first profit warning in 12 quarters as a public company. Analysts were mixed in their reviews of the company's fourth quarter outlook.

Shares were down 4.19 to 5.75. Shares are down 83 percent drop in price since July.

On Wednesday, management revised its fourth quarter revenue and earnings downward to $58 million to $60 million, and 2 cents a share. The company cited a soft advertising market and credit issues among clients, but not a decline in demand for the company's products.

Analysts were mixed on the news, with most finding the company's cash position and leadership in the streaming media as positives for the long run..

CIBC Oppenheimer analyst John Corcoran downgraded the stock, from "buy" to "hold" and provided the grimmest outlook for RealNetworks the sector.

He came to six grim conclusions

  1. The effects of the Internet advertising crunch will be felt throughout all of 2001;
  2. RealNetworks' ad revenue will remain under pressure for the next four quarters;
  3. the streaming media space is developing more slowly than anticipated;
  4. very few firms have developed sustainable business models based on streaming content;
  5. there is further downside risk to the company's revenue and pro forma EPS estimates for 2001;
  6. and there are no major, catalysts that will move the stock in the next several quarters.

Corcoran took issue with management's statement that demand for streaming content from end users is higher than ever, and that RealNetworks is "pumping out more bits" than ever. He said that was "difficult to reconcile with the fact that the company has effectively lowered guidance twice in the past two months."

"In our view, the problem is that most of the 170 million consumers who comprise the company's user footprint paid nothing for the client software and pay nothing for the streaming content they enjoy," Corcoran said in his research note. The company will need to diversify revenue, reduce its exposure to online advertising, and have a sustainable business model before it sees improvements, he said.

Credit Suisse First Boston Heath Terry also downgraded the stock to "hold."

Terry said the long-term outlook for RealNetworks was unchanged, but "it is clear that the current market environment makes it virtually impossible to project with any certainty the near-term trajectory for revenue and earnings." He added that he "plans to return to a more positive opinion once visibility becomes less of a question."

Another downgrade came form Raymond James analyst Phil Leigh, who lowered the company to "market perform" from "strong buy," based on the profit warning, sluggish software sales and the fact that its earnings comparisons won't improve for a year.

On a positive note, Leigh said he continues to believe that "the future Internet will be video-centric and no company is more intensely focused or better positioned to capitalize on the opportunities than is RealNetworks."

Bear Stearns analyst Robert Fagin reiterated an "attractive" rating, and said the company's fourth quarter shortfall was surprising, even though he had anticipated numbers for fiscal 2001 to be below company's guidance.

Fagin lowered his 2001 revenue targets from $325.3 million to $273.8 million, below management's expectation of $300 million. He also lowered earnings from from 23 cents a share to 16 cents a share.

UBS Warburg analyst Michael P. Wallace was more optimistic, and reiterated a "buy" rating. He recommended "buying on weakness," considering the company "has $2 (per share) in cash, is profitable, and a primary beneficiary of broadband."

He also saw the company's "GoldPass" product as a positive as it is rapidly gaining traction.

He reduced estimates for Q4 and 2001, 2002, 2003, and 2004, and lowered his price target to $20 from $50.

"This company will grow with broadband, and $6 is too low for a high quality company like this, in our opinion," Wallace added.