JP Morgan analyst Vasily Karasyov downgraded Real Networks (RNWK) to “Underweight” from “Neutral” this morning, citing concerns that Rhapsody’s iPhone app won’t help buck subscriber declines at the music site.
Here is his reasoning:
- Demand for a subscription music service has been capped, and a mobile app won’t help drive incremental demand even if it is a good product. Karasyov doesn’t believe there is much room for growth on top of the 750K subs reported by Rhapsody last quarter. In fact, he believes subscribers could continue to decline given strong competition from iTunes and limited consumer demand for a subscription streaming service. The company lost 50,000 subscribers last quarter.
- Yesterday’s 7% increase in Real Network shares reflects a belief among investors that the app will help boost subscribers, so now is a good time to get out. Overall, he expects the company’s business to be challenged so “we think the recent share price increase is not supported by an improvement in the company’s earnings power outlook,” Karasyov said.
We were a little surprised by the jump in the stock yesterday as well. After all, is an iPhone app with essentially the same service subscribers appear to be tiring of worth $32 million? (That’s how much the company’s value increased yesterday.) That’s doubtful given that subscription music sites have had a tough time getting consumers excited about their services regardless of what device they are on.
Investors appear to be having second thoughts today. The shares are down almost 7%, giving back pretty much all of yesterday’s gains.
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