Sound Off on Audible

08/05/2005 12:00 am EST

Focus:

Stephen Biggar

Director, Product Strategy, Argus Research Corporation

A "must see" at every Money Show is the special panel presented by Standard & Poor's . Among the panelists is equity analyst Stephen Biggar. Here's he "sounds off" on 5-star rated Audible, a recent stock of the week in S&P's The Outlook.

"Audible (ADBL NASDAQ) is the world's leading provider of digitally-delivered spoken-word audio content. The company allows consumers to purchase and download spoken audio content to their computers and portable audio devices. In our opinion at Standard & Poor's, it has been benefiting from the widespread and growing deployment of portable audio devices and associated strong demand for digital audio content. Its stock carries our highest rating of 5 STARS, or strong buy.

"Audible offers access to more than 70,000 hours of media and 28,000 titles, many of which cannot be obtained elsewhere. Such content includes audio versions of books, newspapers, magazines, and original productions. It offers this content via subscriptions and downloads. Consumers shop for, purchase, and download spoken-word media, generally directly from Audible's Web site or from Apple Computer's iTunes Music Store. Audible is the exclusive provider of spoken-word content via iTunes. Users can purchase individual titles or subscribe to one of Audible's dozens of daily, weekly, or monthly offerings. 

"The audio-book market is estimated at $800 million. Based on Audible's 2004 net revenues of $34.4 million, it had captured a mere 1.3% of this segment. However, we think Audible's market opportunity is considerably larger than just audio books. According to IDC, worldwide shipments of portable audio players are expected to more than triple, from 32.8 million in 2003 to 116.1 million in 2008. In our opinion, this significant user base and projected growth offer substantial opportunity for Audible, given that 56.1 million audio devices were shipped last year, and the company had only 467,000 customers from 1997 through 2004.

"More than 135 kinds of devices are compatible with Audible's technology. Moreover, it has also been readying Audible Wireless, which will enable its content to be downloaded and accessed via wireless phones. It's intended to better pursue what we regard as the vast wireless-handset opportunity. Forthcoming functionality is expected to enable automated downloads of preselected content. Audible's initial noteworthy foray in this segment was its technology and marketing deal with Sprint and an exclusive partnership with XM Satellite Radio. Audible sees its market opportunity as consisting of everything from audio books to talk radio, business information, publishing, magazines and newspapers, and education, and related materials. 

"Several factors will enable Audible to increase its share of this market. For one, the company possesses significant technology advantages, in our view. Audible pioneered the segment and delivers appealing user functionality, much of which is supported by proprietary intellectual property. Its patents enable customers to skip between selections, individual articles, and chapters within selections. Customers can also pause and resume listening where they left off, and can 'bookmark' multiple sections of content. Audible also offers, in our view, proven and patented digital-rights management that enables publishers to control and monetize their content.

"Audible has 224 partners (as of the first quarter), some 60% of which are exclusive relationships. In the second quarter, it announced content partnerships with Harlequin and XM Satellite Radio.  Its agreement with Pearson Education, will initially focus on higher education (the college market), life learning (including self-help, language, and business content), and test preparation (for admissions and licensing exams). Audio versions of Pearson's higher-education study guides are scheduled to be available for the 2005-06 academic year, and the companies expect to create and market education audio offerings for the general consumer later this year.

"Based on earnings 2005 forecasts, Audible appears richly valued. However, for several years, the foundation for most of our valuation work on Internet stocks has been predicated on our discounted cash-flow analysis. In 2004, Audible became free cash-flow positive for the first time and we project that free cash will surge to $51.2 million in 2009. Our 12-month target price is $25. We believe Audible is well-positioned to capitalize on a substantial market opportunity and has notable and durable competitive advantages, a positive financial outlook, improving corporate-governance practices, favorable relative earnings quality, and an attractive valuation and earns our top 5-star buy rating."

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