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Saturday, October 14, 2006

Weekend Edition:DIVX Still Overvalued (DIVX)(RNWK)(MSFT)

DIVX currently has a market cap of $703 million, which is a bit over the top. Or, more than a bit.

The company raised about $146 million in its recent IPO. The company had revenue of $27.3 in the first half of 2006, and net income of $5.9 million. So, it trades at about twelve times sales.

Over at RealNetworks, a company that competes in the same industry, the first half revenue was $89 million and net of $39 million. The company has $769 million in cash and securities, much of it from an antitrust settlement with Microsoft. Real's market cap is $1.8 billion. With its cash backed out, it trades at about six times sales.

RealNetworks has recently set up an agreement with Sandisk to market a direct competitor to the iPod and iTunes. It is arguably in a better position to have a long-term footprint in video on PCs and portable devices. It has been around longer than Divx, and it does not license its core technology as Divx does from MPEG, a patent pool. Divx and Real also compete with the Microsoft Window Media Player, which has the largest market share of software multimedia players.

To think that the market leader should not trade at a premium is a bit absurd. If so, Divx shares are overvalued.

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