If content is king, consider Digital Music Group (NASDAQ:DMGI) a princely heir with a mercenary bent. The company that has been sifting through audio and video libraries in hopes of cashing in with digital distribution posted fourth-quarter results yesterday.
Revenue exploded sixfold, but we're really just talking about a top-line performance of $2.8 million. The company posted a loss of $0.09 a share.
DMG has been acquisitive since going public last year at $9.75 a pop. Its original binges were music-related entities like Digital Musicworks International, Psychobaby, and Digital Rights Agency.
Its bread and butter on dot-com toast has been the monetization of independent record label material in cyberspace. Apple (NASDAQ:AAPL) accounted for 70% of its revenue this past quarter.
Investors have been singing a different tune, slashing the stock in half since the IPO. Realistic valuations of the somewhat mediocre library that the company is promoting have come into play. DMG is representing 196,200 tracks digitally, but the average track is being downloaded less than seven times a month.
If there is an upside to a company that craters shortly after its IPO, it's that the cash mattress isn't usually that far away. Nearly half of DMG's stock price is backed by the cash on its balance sheet.
Better opportunities may lurk in the company's decision to broaden its scope to represent the digital distribution of videos as well. The company signed a revenue-sharing deal with Google's (NASDAQ:GOOG) YouTube last month that will allow it to cash in on its video properties, including Gumby, I Spy, and SNL's The Mr. Bill Show.
How big a hit will DMG need to turn a profit? It will have to be substantial. Let's take a closer look at the company's posted performance for all of 2006 to clarify that point. DMG generated revenue of $5.6 million, yet roughly 60% of that -- or $3.3 million -- went back to the actual content owners. Making matters worse in 2006 is that the company's operating, general, and administrative overhead was slightly more than revenue before you account for the content owner payouts.
Can DMG pad its music library? Will generous video-sharing sites hold the real potential? There are so many deals worth brokering. The $20.5 million in cash will keep the company going for a couple of more years to get it right. Still, there doesn't seem to be a compelling reason to jump on this stock at the moment. If anything, DMG shows that you can be at the right place at the right time and still be the wrong stock.
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Longtime Fool contributor Rick Munarriz knows he has Gumby slippers somewhere around the house, but he's a klutz when it comes to sculpting with clay. He does not own shares in any of the companies mentioned in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
