Roxio: A "Best Buy"?

07/09/2004 12:00 am EST


Gregory Spear

Editor and President, The Spear Report

Napster is the controversial system that made music downloading a household term. Now, as part of Roxio, it is a legitimate play in legal downloading – and a buy from two of the best advisors around: John Buckingham and Gregory Spear.

"The record industry is transforming in the digital age, as those in the biz now realize that the easiest and most efficient way to distribute music is via download," says Gregory Spear, editor of The Spear Report. "Roxio (ROXI NASDAQ), which makes CD-burning and other digital media software, entered the online music business in October when it reopened Napster, the formerly free and controversial music download service. Napster, perhaps the most recognized name in music downloads, recently announced a partnership with consumer electronics giant Best Buy, which features a co-branding arrangement for downloads through Best Buy is serious about this deal, as they took a $10 million stake in Roxio. Meanwhile, Best Buy, with 614 stores, is a force to be reckoned with. Imagine, for instance, that when you buy a computer or PDA at Best Buy, you find Napster is already set up, with a small library of classic songs already installed and ready to play. Get the idea? This will help take music downloading out of the kid's bedroom and into the living room and the office. This is a speculative tech play (the stock has no p/e multiple) and it is the type of stock we would generally steer away from. Nevertheless, the market cap of just $170 million is attractive, and more than 20% of the ROXI float is sold short. That should help ROXI get off to a flying start."

"We yawned - OK, we scoffed – when Roxio, a member of our Millennium Portfolio, purchased Napster assets from bankruptcy in 2002," says John Buckingham, contributing editor to The Prudent Speculator . "At the time, we believed that the brand, while powerful among thieves, would not translate into profits for the brand-owner given its infamy. Then, Roxio purchased Pressplay, an online music service set up by Universal Music and Sony Music, and combined the two into the new Napster service, which it launched in October 2003. Roxio had cumulative losses of $90.7 million related to its online music venture in the year ended March 31, 2004. But Roxio did manage to generate $12 million in online music revenue last fiscal year, and the recent news from Best Buy, suggests that Roxio is one major step closer to parlaying the Napster asset to profits. We are glad to see the company building a strong distribution partner, adding one more brick in the foundation by increasing the visibility of the service. We boosted our long term and fundamental goal prices for the stock to $8 and $9 per share, respectively."

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