Patience is a virtue with Napster

Back in August, I wrote an article about Napster, Inc. (NASDAQ: NAPS) when the share price was around $3.00. Since then, my prediction that Napster could be an acquisition target came true, driving the share price up 70%, all the way to $5.10 at one point.

Fast-Forward to December, and shares are trading back in the upper $3 range again. Napster was not able to sell the company as fast as everyone in our 'Instant Gratification-minded' country expected. Investors quickly bailed on the stock when a buyout didn't come right away.

No one can predict the future, but I think we've narrowed the future for Napster down to 3 scenarios - 2 of which we think could make you some big money.

Scenario # 1 - If you followed the Loudeye acquisition by Nokia (NYSE: NOK) earlier this year, you know that a similar situation occurred prior to their buyout as what's going on at Napster right now. When Loudeye originally announced that they were ready to sell the company, the stock shot up to $2.50, only to return back to $1.75 after the excitement wore off and a buyer didn't immediately step up to the plate. Those who stuck around enjoyed almost a 300% gain when Nokia purchased the company for $4.50. Could a major player like Nokia make the right bid for Napster? Only time will tell. Analysts at DA Davidson think that Nokia could bring in as much as $6.25 a share. The Stockmasters think their estimate is a little conservative. Napster is obviously holding out for more money, and why wouldn't they with a strong brand like Napster? Now that Metallica is friends with good ol' Napster, they've got nothing to worry about, or do they? Our prediction is $7.50-$8.50 a share. That may sound like a stretch for those of you who have watched this stock for the past weeks, but hang on, there's more...

Scenario # 2 - If the proposed buyout doesn't come, Napster could still manage to surprise everyone with revenue and earnings growth in 2007. If you've been ignoring all news but acquisition news, let me fill you in. On December 12th, Ericcson (NASDAQ: ERIC) and Napster announced the first European launch of Napster Mobile in Ireland. In November they also launched Napster mobile with Cingular and DoCoMo (DCM) of Japan, two of the largest wireless carriers in the world. We won't know what revenues will look like for Napster mobile until Q4 earnings are reported in 2007, but they could be huge - Napster's mobile offering is now available to over 100 million wireless customers - that's certainly nothing to scoff at. In addition, their website traffic grew by 42% in the 2nd quarter, if they can continue that growth, the ad revenue will start pouring in. Furthermore, their cost-cutting ability has been very impressive, they lost .21 cents a share last quarter and analysts predicted a loss of .31 cents.

Scenario # 3 - Napster's Doomsday Scenario. They announce that no one is interested in buying the company. Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) and Real Networks (NASDAQ: RNWK) all start offering a subscription service for less than Napster. Microsoft's Zune and Real Networks already have a subscription service and if they lower their prices, Napster will lose it's market share. There still might be some hope from Napster Mobile, but the stock price would tank for sure, and on the off-chance that someone down the road would acquire them for Napster Mobile, the buyout would be less than projected; kiss $7.50 - $8.50 goodbye and say hello to my little friend, $3.50- $4.50.

Bonus Scenario - Lars from Metallica seeks revenge on Napster. You guessed it, Lars walks into Napster's corporate office, still distraught over the legal battle in 2000. He goes Rambo, screaming at the top of his lungs and unleashes 10,000 rounds from an AK-47. After his rampage is done, he knocks over the water cooler and naturally, sets the building on fire. Napster's share price drops to 15 cents then goes bankrupt 5 weeks after the incident.

I'm not much of a gambling man, but I'll take a 2 out of 3 shot any day of the week (Bonus scenario not included). There is a chance for money to be made with Napster, so you make the call.

For more savvy market commentary go to http://thestockmasters.com

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