Remember Real Player? A Look at Life Before iTunes and the iPod

Before the advent of Apple's AAPL iTunes, there were several media players and companies that were very popular among computer users. Along with Microsoft's MSFT Windows Media Player, there was a popular product called Real Player. I personally used Real Player, and was very happy with its interface and usability. In fact, I would liken it to an early version of iTunes.

Unfortunately for RealNetworks RNWK, the creator of Real Player, the public fervor backing the iPod and iTunes became extremely great. Since that time in the early 2000's, RealNetworks' stock has dropped to the point where the company has become a small-cap company. With a relatively small market capitalization of about $250 million, RealNetworks has expanded its product suite to include more than just a music player. It has started to produce games and and has ported its multimedia suite to mobile devices. Lastly, it has attempted to delve into enterprise solutions for SMS messaging and ringtones for phones.

Over the last few years, RealNetworks has been floundering for business. Its top-line has been wavering between $400 million and $600 million, topping out in the fiscal year of 2008. Interestingly, its research & development was continuously increasing until 2009; for whatever reason, the company decided to decrease R&D expenditures in 2010. This may be a sign that it is satisfied with its current product suite and is now looking more to developing its products instead of coming up with more. One thing that is positive is that sales, general, and administrative expenses have been decreasing over the last several years. This means that the company is being prudent and reacting well when revenues and consumer demand are decreasing.

RealNetworks' cash situation has been negative over the last few years. Operating cash flow has been negative repeatedly. Regardless if net income was positive or negative, working capital fluctuations have continuously been plaguing operational cash. Various investments and capital expenditures have also decreased cash over the last several years. Whether the company has decided to use capital for investments to hedge itself or to make profits, RealNetworks' overall activity has resulted in a net outflow of cash. Lastly, financing activities have had a net outflow of cash.

From a different perspective, RealNetworks does not look as impressive as its competitors. For example, its revenue growth and EPS growth are much lower than those of its average competitors. Unfortunately, net margins along with operating margins are negative as well. From a value perspective, return on equity was negative. On the flip side, the company appears to be undervalued, based on price/book value and price/sales.

Ultimately, RealNetworks does not look like the best investment for investors considering the multimedia industry. Like with many former competitors, Apple took so much market share that investors started to pull out of the company. Clients and retail sales also started to diminish, rendering the company almost useless in the face of large competitors like Apple. Investors should learn more about the company's product suite and its management's plans for the future.

RealNetworks is trading at about $7.45, down over 55% for the year.