When executives at
, a recent addition to my
$100,000 Real-Money Portfolio
, decided to start hurling lawsuits at some of the country's
biggest cable and telecom companies a few years ago, many investors
figured this industry's "David" simply couldn't prevail in court
against the industry's Goliaths. Well, with yet another solid legal
victory now in hand, it's time to rewrite that outlook.
Tivo has not only prevailed in court -- time and again -- but
its core business is getting strong as well, giving the company's
cynics another reason to upgrade their view.
On Monday, Sept. 24, Tivo announced that
has decided to stop a court fight and pay Tivo at least $250
million during the next six years (Verizon will pay $100 million
now and the rest in installments.) This continues a string of legal
wins for Tivo, which I discussed
a few weeks ago
when I added this stock to my portfolio.
If you keep winning legal settlements that bring upfront cash
now and annual payments later, then you're bound to develop a
bullet-proofbalance sheet . Tivo's cash rose from $209 million at
the end of 2010 to $619 million at the end of 2011, and with the
Verizon settlement, that figure is bound to keep rising.
Roughly speaking, Tivo's cash pile will likely be worth around
$5 a share by the end of this year, and perhaps $6 or even $7 by a
share by the end of 2013. That depends on how still-pending
Cisco Systems (Nasdaq:
play out. The fact that Verizon and
have chose to settle with Tivo increases the likelihood that Cisco
and Motorola will acquiesce and take the same path.
Here's what some investors may be overlooking from this week's
legal settlement: Not only did Verizon agree that it infringed on
Tivo's patents, but it's also looking at ways to use Tivo's
technology in its businesses. For example, Verizon's joint venture
to launch a video-streaming service under the RedBox brand may use
a Tivo interface. This means the $250 million headline figure could
actually be much higher.
For Tivo, these victories put cash on the balance sheet and help
lower the company's legal bills, which have been stubbornly high
the past few years. And falling legal expenses are likely to come
at a time of rising sales for the company, helping Tivo generate
risingfree cash flow . As I noted a few weeks ago, a number
of cable operators are giving Tivo's software a fresh look as the
company continues to develop its technology platform. Simply put,
Tivo's heavy research and development (R&D) spending has led to
a rising degree of functionality that other solutions can't hope to
match. That's a conclusion Verizon has just drawn by agreeing to
use Tivo's technology -- and one that other industry players are
beginning to realize as well.
Risks to Consider:
As long as Cisco and Motorola seek to drag out their legal
proceedings with Tivo,shares may still be dogged by too-high legal
Action to Take -->
Tivo's agreement with Verizon came on a day in which stocks
are moving lower. So an initial 15% premarket pop is now just a 5%
gain as trading is underway. Yet it's likely only a matter of time
before analysts revise their balance sheet and income statements
assumptions for Tivo, along with their price targets. So the muted
share price reaction in Monday trading provides an entry point for
those that failed to get into this stock ahead of the Verizon
verdict. On a sum-of-the-parts basis, I still see this stock moving
into the mid-teens, or roughly 50% above current levels.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of TIVO, CSCO in one or more if its "real money"
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