We are professional stock-pickers. While we may often recommend larger names, we always are on the lookout for small-cap, high alpha opportunities to provide for our subscribers. While there is a more significant amount of risk in small-cap stocks, appropriately sized positions that maintain portfolio diversity can provide solid risk-adjusted returns. Real Networks (RNWK) is a tiny name with no sell-side coverage and a complicated history that impedes investor attention from the exciting parts of the business. Thus, we’ve endeavored to make this article a comprehensive source of information on the stock and its uniquely experienced management.

Source: Company Reports

Real Networks is a small-cap name with a very outsized history. While this stock may look like a low-dollar, high-risk name with poor prospects, we took a closer look. After nearly being de-listed following a long, losing slog in digital media the company has done a true pivot toward exciting technology. In addition, the financial momentum is all moving in the right direction. After shedding Napster the company’s profit margin is 77%. EBITDA loss has been moving in the right direction for six consecutive quarters and the company will likely be cashflow positive next reporting period. Valuation looks low when compared with peers and the positive product developments.

Source: SeekingAlpha

The problematic legacy assets that investors hated have been dealt with by management. The exciting areas of free-to-mobile gaming and computer vision are set to become future cash cows. They grew at a more than healthy 110% over the last year.  SAFR, their biometric facial recognition platform is in exploratory phases with the US Airforce, NTT Docomo in Japan, and T-Money in South Korea. It is landing new security clients on a regular basis and researching and collaborating to expand use-cases into healthcare, gaming, and education.

The main reason we like this obscure stock has nothing to do with its history but is rather this exciting new product. While free-to-mobile gaming is an earner, we think SAFR is the potential homerun. It appears to have incredible upside potential, high-profit margins, and a plethora of use cases in the area of computer vision/facial recognition (really, it’s the area of machine learning and artificial intelligence).

In addition to strong prospects and positive financial momentum, the company’s management team appears to have the willingness, experience, and unique expertise to hit a home-run in their new growth areas. This stock has many intersecting things we like about it. It’s surveillance and security component make it adjacent to our 2021 Investing Theme of Rising Violence in the USA.  The company has made impressive efforts to pivot toward healthcare during COVID-19 and is the only off-the-shelf, commercially available facial recognition platform that can recognize users through masks. 

One of our ‘Granny Shots’ themes focuses on investing in companies that provide and benefit from AI and automation. Conditional access to office buildings and healthcare use cases as a result of COVID-19 have only increased the commercial viability for the company’s computer vision product. It is not hard to see applications proliferating on an exponential basis as augmented reality and the 4^th industrial revolution create new utility. There are rumors the company will be adding temperature sensing abilities to the platform, which would obviously be highly useful. Look at what Remark Holdings (MARK) price/sales ratio is to give you an idea of where the valuation of this stock is headed in the event of commercial success.

Source: SeekingAlpha

Seattle’s Best: Great Management Meets Commercially Viable AI Opportunity

Despite recent rumblings of companies and employees moving to Texas and Florida, Seattle and Silicon Valley remain the undisputed centers of technology innovation in the world. They have different strengths and weaknesses in terms of the types of companies they produce. There is much literature on the differences you’ll find between Silicon Valley and Seattle we even found a cool infographic.

One common thing observed by multiple VC’s is that entrepreneurs from Seattle tend to be better executers and those from Silicon Valley are better at ‘chest thumping’. Another emerging difference in Seattle, long-known for its dominance in cloud computing, is the edge that regional-hub is developing in machine-learning and artificial intelligence. This will serve Real Networks as it expands its product. The company’s turnaround harkens back to the ‘roll-up-your-sleeves-and-do-it’ attitude that was pervasive in the late 90s when it was one of the hottest places to work in tech. Indeed, the infectious energy at the company spawned a lot of the region’s most successful entrepreneurs.

The story of how a company founded in 1994 as Progressive Networksby a former Microsoft executive to distribute political content eventually revolutionized the internet, fell out of favor and tried to reinvent itself until the brink of being de-listed is a fascinating one. Everyone loves an underdog. Instead of failing it resurrected itself as a leader in artificial intelligences application to biometrics. Along the way in this story, CEO Rob Glaser took on Microsoft and Bill Gates and won a $761 million settlement from his former employer and the man who passed him up to head up media efforts at Microsoft.

So, to put it lightly the management team at Real Networks are no slouches. Mr. Glaser was once known as one of the leading billionaires in Tech and for his progressive politics. He was once one of the top donors in the Democratic party and has progressive credentials and government connections (US Senator Maria Cantwell is a Real Networks alumni) that should serve the company very well as it pursues federal contracts and image-conscience corporate clients. Indeed, it already has. Setelsa Security selected SAFR based partially on the ethical considerations that went into the platform’s development and its lack of bias compared to other platforms.

 The glory was short-lived as the immense commercial concessions he secured from Microsoft would soon be worthless in the face of Apple’s superior platform and strategy. This is not typically the type of history management teams have in hot areas like emerging AI applications. Still, we think the company’s dynamic CEO’s seasoned management experience and connections should only work in the company’s favor compared to the typical ‘start-up’, which is really what the growth businesses resemble in terms of upside, but with the downside mitigated by a stalwart management team that knows how to survive.

In one light, Rob Glaser can be seen as a cautionary tale of late 90s excess, the guy who could only make it work with Tony Fadell, the iPhone’s god father, for six weeks because of his bull-in-a-china-shop management style. On the other hand, it’s impressive he kept this unlucky internet pioneer alive in the face of the documented unfair competitive pressures his platform was subject to. Cracking the B2C code at the convergence of media and the internet was never easy.

We think this latest pivot, if nothing else, will be informed by experiences and relationships of a man who has one of the most storied Seattle tech careers of the 1990s boom. You can bet that when Amazon received complaints about its facial recognition software’s bias problem from shareholders (a problem RNWK’s platform doesn’t have) that senior folks at Amazon, including perhaps Mr. Bezos, became interested in what was going on in Rob Glaser’s shop. This should give you an idea as to the type of upside potential RNWK has.  As Rob Glaser put it, in congruence with Seattle’s characteristic entrepreneurial humility, he sees the ‘largest, most robust, and most diverse commercial pipeline’ associated with the company’s computer vision advances since his early days in streaming. We think it could be a homerun for the minority owner of the Seattle Mariners.

The experience from being in the trenches in some of the Technology industry’s most storied and prolific battles seems to be a significant asset of Real Networks that many may miss given the first layer of information readily available on the company. The company’s CEO was also partner at an influential Seattle venture firm, Accel Partners. The start-up, entrepreneurial energy Mr. Glaser brings is supplemented by the board as well.

Source: Company Reports

When we think of the rise of technology in the latter part of the 20^th century, we often remember the history from the winners’ perspective. We point out to our subscribers that even though most of the stocks eventually went to zero in the height of the web boom, the ones that didn’t (the household names that changed all our collective lives forever) were more than enough to compensate for the loss. It is a rare thing indeed for a stock to have survived despite being on the wrong side of the powerful commercial forces that led to the most valuable companies in the world’s history. It’s a testament to the company’s espirit de corps and pro-innovation environment that it has survived the tumult since its heyday.

Suppose you could get access to a hot Seattle AI startup as cheaply as you can with acquiring RNWK shares; you probably would. Instead of some kids with no management experience at the helm, you have one of the founding fathers of the digital media revolution. This is how we think of this investment, and if it didn’t have a scarlet letter in the tech world, it would likely be valued far higher. The company’s foremost growth opportunity is a proven technology with many competitive advantages and is in the early stages of what could potentially be widescale commercial deployment.

Risks and Where We Could Be Wrong

There are always plenty of risks that could derail a small-cap stock whose primary profit engine is basically a captive technology startup. One of the primary risks we would see is that another entrant beats them in the race for technological superiority. This risk seems relatively low right now as customers seem to love and prefer their platform over others. Another key risk, which this company is well acquainted with, is how consumers will respond to the product. Backlash against facial recognition has already occurred in other contexts, but the company already seems to enjoy a reputation as leading the industry on ethical issues and lack of bias.

Prior “Signals”