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RealNetworks has been given up for dead. People think it's a has-been, selling an obsolete product. So, they have sold the stock until it's below $8. What do you get for your $8? The most recent quarterly report says the company has $195,000,000 net cash in the bank, or $5.40 per share. Also, if you delve into the 10-Q for the second quarter of 2014 (ended June 30), you will find a discussion of the 45% share of Rhapsody that RealNetworks owns. It’s reported on RNWK’s books with a “carrying value” of $10 million. But what is the real value of 45% of Rhapsody? Rhapsody is a music streaming company. It isn’t public, so it doesn’t have a stock price to tell us its value. But, its competitor, Pandora, is public; it had Q2 revenues of $219 million and a market cap of $5.4 billion. Rhapsody had Q2 revenue of $42 million, or 19% as much as Pandora. If we figure that it should have a similar ratio of revenue to market cap, Rhapsody might be worth 19% of Pandora’s market cap, or just over a billion dollars. RealNetworks owns 45%, so its share of Rhapsody is worth about $450,000,000. Divide this by the share count of 36 million, and you get $12.50 per share. Add in the $5.40 in cash per share, and you can see that RNWK has a LIQUIDATION VALUE of almost $18.00 per share. That’s right, if you bought the shares today at $8, and the company were just broken up and sold for parts tomorrow, you would get back $18 per share, gaining more than 120% over your purchase price. This is quite extraordinary. I have never seen anything like this sort of bargain, ever.

But it gets better! Last year, RNWK launched a service called RealPlayer Cloud, which lets users upload and share videos. You might think that YouTube already has this niche covered, but RealPlayer Cloud seems to offer enough advantages of privacy, convenience and quality to attract a following. It grew from 2 million users in Q1 to 5 million users in Q2 this year. That’s a pretty spectacular 150% quarterly growth rate. Say the growth slows to 120% in Q3, then 100% in Q4, then 80%, then 60%, then 40%, then 30%, then 20%, then levels off at 10% per quarter for a couple of years. RealPlayer Cloud would grow to 200 million users in less than three years. That’s about the same as the current size of Dropbox, a somewhat similar service with a similar pricing model. Dropbox is similar enough to RealPlayer Cloud (though not a direct competitor) that we might expect it to have a similar value. And what is the value of Dropbox? It doesn’t trade on the open market. But, private investment firms trade chunks of its equity at prices that value the whole company at over $9 billion. If RealPlayer Cloud matches the value of Dropbox, RNWK will be worth $250 per share in about three years. Now, that is only speculation. Maybe there’s only a 10% chance of that happening. But still, a 10% chance of making $250 ought to mean that RealPlayer Cloud is worth $25 per RNWK share. Or, maybe, give it a steep time-value-discount and say it’s worth $15 per share, right now. Add that to the cash and the Rhapsody holding, and I think it’s reasonable to value RNWK at $33 a share today, or FOUR TIMES its current price.

Are you thinking that there must be a catch? Maybe the management is not stockholder friendly? Note that the founder and current CEO, Rob Glaser, owns 35% of the company, so he isn’t likely to do anything to screw up the stock’s value. For example, recent dilution has been less than 3% a year, which seems tolerable. I tried to find the catch, and couldn't.

Disclosure: needless to say, I have bought a huge quantity of RNWK. Huge! Even borrowed thousands of dollars to do it. So, if you find a flaw in my reasoning, please post it here so I can sell some of the shares before they get me into trouble.
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