Napster Threatened by iPhone, Wireless Trends - Bear

How the mighty have fallen.

Bear Stearns analyst Kunal Madhukar this morning launched coverage of Napster (NAPS) with an Underperform rating. While the stock is close to a 52-week low, he asserts that “the pure-play music business faces significant challenges.”

Quite a dramatic change from the days when Napster traffic dominated the Web.

Madhukar says the market is in a wait-and-see mode, seeking more visibility on the company’s evolving wireless music initiatives. But he notes that “current wireless deployments are limited, both in terms of the number of offerings, as well as the economics for Napster.” He adds that in the U.S., where the company has

a deal to offer service to AT&T (T) subscribers, the Apple (AAPL) iPhone “remains a significant and immediate threat.”

Madhhukar notes that the company has about $70 million in cash - the company’s market cap is only $91 million. And he says NAPS should be break-even this year on a free cash flow basis. But he also notes that a 2006 announcement that the company was seeking strategic alternatives did not result in any transaction. He also notes that the company has reduced marketing spending, placing most of its emphasis on the wireless initiatives, resulting in “stagnated or declining sub growth.” He also notes that the company cannot match Real Networks (RNWK) in ad spending or strategic acquisitions, “which severely limits flexibility.”

For a real sense of how negative the market has turned on the company, consider this: ex-cash, the stock trades at 0.2x estimated March 2009 revenues.

NAPS, which in 2002 traded as high as $25, Thursday is off 4 cents at $1.97.