Napster, Inc (NASDAQ:NAPS) hit $1.40 a share today and everyday they come closer to falling under $1. Their all new MP3 store couldn't distract investors from their Q4 report and a flat 2008 guidance.  So, do you buy the 16 oz. Coke or a share of Napster?

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That somebody happens to be Bear Sterns analyst Kunal Madhukar.  Thanks to Madhukar, his upgrade last week sent shares of Napster Inc. (NASDAQ:NAPS) up 15%.  With today's pullback, shares of NAPS are only up 6.5% since his upgrade to "Outperform" from "Underperform."  Most of you know the Masters have talked up Napster in the past, but now Wall Street is onboard.

On Feb 11th, Bear Stearns analyst Kunal Madhukar wrote that Napster's disinterest, coupled with a trading imbalance that resulted from the company leaving the S&P 600 Small Cap Index in February, "has resulted in a compelling buying opportunity for investors who are willing to hold the shares for 12 (to) 18 months."

In the past year, the stock has traded between $1.60 and $4.46.

Madhukar, who has a $2.50 price target on Napster shares, noted Napster finished its third quarter in December with $69 million in cash and equivalents. Based on its 43.6 million outstanding shares - an additional 2.4 million are marked as restricted share awards for employees and will likely vest in the next few years - the company's market value is $71 million, and enterprise value is about $2 million, Madhukar said.

"At current valuations, in our view, investors are effectively buying the cash at face value, and getting the company for free," he said.

Madhukar wrote that the market is "more than discounting" risks to Napster's business, but that the company isn't getting credit for its brand, technology, portal, partnerships or for cash and tax-related net operating losses.

Fellow Masters, this is a long-term hold, but any other good news and you could bank 5 to 10% in a single day.  Above all, NAPS is a stock to add to your watch list.

Is Lars from Metallica’s dream of Napster going out of business finally coming true?  Or will the ever-present underdog that is Napster (NAPS) come back swinging like Rocky Balboa vs Apollo Creed?

Napster shares just broke a new 52 week low today, down -6.44% to $1.89 a share.

Has anyone checked the company’s steadily improving balance sheet lately? Revenue and Net income are steadily increasing, while cash levels have improved significantly. Does this look like a business that’s going to close its doors anytime soon?

Financials (In millions of USD)

Napster is looking severely undervalued at these levels. The stock price decline after releasing their best earnings ever just doesn’t add up. On top of that, their partnership with AT&T is still in an early stage – they just released their first mobile phone that supports Napster Mobile. Investors shouldn’t count the partnership out; it could lead to a major source of revenue for the company in the near future.

The Stockmasters think Napster is a potential Value Play and although it is a high risk trade, the potential gain, especially if they get acquired, is well worth the risk.

Article written by Eric Cheshier

Co-Founder of theStockMasters.com

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