Analysts Fired Up Over Real Networks

Real Networks (RNWK) shares are on the rise Thursday morning, thanks to a pair of upbeat analyst reports.

Bear Stearns analyst Kunal Madhukar launched coverage of the company with an Outperform rating and an $8 price target. He notes that the stock had dropped nearly to a 52-week low as of yesterday’s close, providing “a compelling entry point for investors.”

His take is that, while the Street has concerns about the company’s flagship music business, at current prices you basically are buying its other businesses - games, media software and enterprise - with the music operation for free. He offers six reasons to buy the stock:

• Music constraints are disappearing, with adoption of music-capable phones.
• RNWK’s Verizon (VZ) distribution deal provides “legitimacy,” like autos for satellite radio.
• The non-music businesses are profitable, free cash flow positive and growing.
• The company is likely to continue making strategic acquisitions to fill technology and service gaps.
• A compelling valuation provides downside support.
• You basically get the music business for nothing.

Madhukar notes that the company ended the third quarter with $500 million in net cash, or about $3.27 a share. The shares trade for 0.6x estimates ‘08 revenue, 10x ‘08 free cash flow, and about 1x book value.

Meanwhile, Stifel Nicolaus analyst Kit Spring asserts that RNWK shares have historically posted strong gains in the period around the Consumer Electronics Show - on average 13.7% in a two week period over the past 10 years. Why? Because the company tends to announce significant news at CES, the latest edition of which begins Sunday night in Las Vegas.

Spring maintains a Hold rating on the shares, citing “intense competition” offset by a reasonable valuation. He says the stock looks cheap in terms of break-up value, but doubts CEO Rob Glaser has any interest in selling the company.

RNWK Thursday is up 16 cents, or 2.7%, at $6.12.