RealNetworks Back in Black

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If you take RealNetworks (Nasdaq: RNWK) up on its overhyped offer for 25 free monthly song streams, why not give AC/DC's "Back in Black" a shot? After 11 straight quarterly losses, the company finally broke into the black last night, posting a negligible profit on a 27% spike in March quarter revenues.

With its digital music and online gaming segments growing by at least 80% over the past year, those two divisions now combine for 45% of the company's revenue mix. So the fact that RealNetworks became profitable again while in the middle of a revenue model makeover is even more impressive.

This doesn't mean that RealNetworks will have it easy from here on out. Though the company was a digital audio specialist before Napster (Nasdaq: NAPS) or Apple Computer's (Nasdaq: AAPL) genre-altering iPod, it is now pitted not only against those two established brands, but also music streaming software and digital music storefronts run by deep-pocketed giants like Microsoft (Nasdaq: MSFT) and Yahoo! (Nasdaq: YHOO).

How cruel can life be? RealNetworks had it right all along. Digital audio matters, yet it has seen its stock stuck in the single digits for nearly four years now. While a lack of profitability wasn't the only thing holding the company's shares back, at least reluctant investors won't have that as an excuse to avoid buying into RealNetworks now.

The company expects profitability to stick around this time. It is also raising its revenue guidance for 2005 to between $320 million and $330 million, which means the top line will be growing by at least 20% for the year as a whole.

Some of our Rule Breakers newsletter service subscribers have been discussing the company's potential in their dedicated discussion board area. Is RealNetworks a Rule Breaker? We've been asking that question of several companies lately as we take a look at the investment potential of the most dynamic growth stocks out there. So, what about RealNetworks?

RealNetworks was certainly a revolutionary pioneer. While I would love to see the company use some of its ample cash reserves to buy back its shares (with 185 million fully diluted shares, it's going to take some time before earnings per share grow into something material), I can respect the company's greenbacks. Over the past year RealNetworks has grown its subscriber count from 1.3 million to nearly 1.9 million, and that's certainly a positive.

So what's missing? Could it be the "wow" factor? Giving away what amounts to less than two hours a month of audio streams isn't the kind of ammo that will put RealNetworks on the map. Still, it's got its heart in the right place. Now let's see if it can make the market's heart skip a beat for a change.

Other lyrical poetry from our Fooldom analytical orchestra:

• The company's Rhapsody Blue announcement was more hype than substance.
• Still, it's a noble effort to try to win market share in the highly contested digital music space.
• In January it posted its 11th consecutive quarterly loss, though the red ink came with an asterisk.

Longtime Fool contributor Rick Munarriz wonders if Bohemians dig Rhapsody. He does not own shares in any of the companies mentioned in this story. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks a day early.