Napster: The Music is Sounding Better and Better

If you've been following my blog, you know I've recommended Napster Inc. (NAPS) twice. Once was last June when it was around $3, and again in October when it had gained 50% to $4.50. I had predicted it could get to $6, and I still believe that.

The stock has lost some value since then, but it jumped again earlier this month when it was announced that AOL would make Napster its exclusive provider for AOL Music. Formerly provided by AOL Now, the service has more than 300,000 subscribers and will provide a nice revenue bump for Napster.

The stock has dipped again since the announcement, but I think that was investors taking profits and that doesn't worry me. Napster is still a stock that can continue to make you money. NAPS is still operating at a loss, but its numbers are improving. Revenues for the first two quarters of 2006 were up over the same quarters in 2005. For the six months ending Sept. 30, 2006, earnings were up 20% and operating expenses were down 25% compared to the six months ending Sept. 30, 2005. The digital music industry doubled in 2006 to $2 billion, but it still represents a small percentage of sales, which means there is still plenty of room for growth in this side of the business.

Yes, there certainly is risk here. Apple Inc. (AAPL) continues to dominate the market, and competition is fierce from rivals like RealNetworks (RNWK) and Rhapsody. But Napster still has a recognized and solid brand name, and is still rumored to be an acquisition target for a company that can use its revenue stream and brand.

Type of stock: A digital music company with growing revenues, a good brand name, and the potential for acquisition.

Price target: I think Napster is still a good buy at $4; especially if you're willing to be patient. If you want to be more careful, wait for it to drop to $3.50. The stock should hit $6 in 2007.

NAPS 1-yr chart

Comments

[YenKenZen:]

I agree with NAPS potential.. I am curious if you know / have any data on overall size of music industry and how digital music is impacting it.. it would be nice to know how much upside potential does NAPS have for revenue etc.

2007 Mar 30 01:21 PM