Just because you develop a popular new technology, there's no
guarantee
you can control its destiny. Digital video recorder (
DVR
) pioneer
Tivo (Nasdaq:
TIVO
)
convinced cable companies it's program-recording devices would
revolutionize viewing habits, as it was far more functional than a
plain-old VCR.
Since its founding in 1997, the company quickly gained traction,
hitting almost $100 million in sales by fiscal (January) 2003,
roughly $275 million by fiscal 2008, with expectations of reaching
$500 million in annual sales by the current
fiscal year
.
But cable operators had another idea.
Time Warner Cable (NYSE:
TWC
)
and other large cable companies decided to go with cheaper DVR
devices made by firms such as
Cisco Systems (Nasdaq:
CSCO
)
and
Motorola Mobility Solutions (NYSE:
MMI
)
.
As a result, Tivo's sales have been falling ever since, and
investors began to wonder whether the company would even be around
a half-decade from now. Well, that obituary was premature. Tivo
recently delivered a surprisingly strong quarter, fueled by
better-than-expected new subscriber gains.
In the quarter ended October, Tivo showed sequential gain in net
new subscribers for the first time in almost two years. And
analysts say the numbers will look even better in the quarters to
come.
A shift to the second tier
Tivo grew frustrated in its dealings with the largest cable
operators (known as MSOs), which were hammering the company on
price. A refusal to cut prices sharply led to terminated contracts,
so Tivo's management decided to focus on second-tier MSOs. Smaller
MSOs lack the engineering resources to deliver the robust
technology Tivo has developed. The move seems to be paying off now.
For example, United Kingdom's Virgin Media, which has more than 2
million subscribers, has paired up with Tivo. Virgin's rollout is
taking place at a faster-than-expected clip, which accounts for
Tivo's solid quarterly results and projected robust new net adds
for the next few quarters as well. But this isn't just about Virgin
Media.
Tivo is also ramping up with Spain's ONO with plans for a steady
rollout. In the United States, the company is running a pilot
program with Charter Communications in Texas that could roll out
across Charter's entire network if it's successful. On a recent
conferencecall , management noted ongoing discussions with other
MSOs and expects to make a few announcements regarding new customer
wins in the next few months.
Tivo's subscriber base appears to have bottomed out at 1.9 million
this past July, but could rebound to 4 million by the end of 2012,
according to analysts at Brean Murray. By their math, the
subscriber base could swell to 6 million a year later and 8 million
by the end of the following year (which ends January 2015).
Analysts cite a pair of other reasons Tivo should hold great
appeal. First, the company carries $400 million in net cash, which
amounts to $3.50 a share. Second, the company is heading to court
soon and could see a successful big payday. Tivo is suing
AT&T (NYSE:
T
)
for patent infringement, and the trial begins on Jan. 9, 2012. In
addition, Tivo won a separate legal victory against
Verizon (NYSE:
VZ
)
, with a settlement conference expected to start on Jan. 4, 2012.
Analysts at Albert Fried say the two lawsuits could
yield
a combined $350 million to $600 million for Tivo, or $3 to $5 a
share.
Risks to Consider:
Although Tivo owns -- and has successfully defended -- a wide
range of patents, rivals such as Cisco continue to invest heavily
in new technologies that could leapfrog Tivo in terms of innovative
features.
Action to Take-->
Shares
of Tivo have swung wildly from $7 to $12 this year but are now down
to roughly $9.55 -- despite the impressive October quarter and
apparent newfound momentum in the subscriber base. Analysts now say
the stock has 50% upside -- or more -- as the company delivers a
few more robust quarters.
Analysts at Albert Fried sees shares moving up to $15, using a
sum-of-the-parts analysis of the cash balance, the current
subscriber base and a discounted value assigned to the pending
lawsuits. Brean Murray applies a similar methodology and arrives at
a more modest $14
price target
. JMP Securities, with an $18 price target -- or almost 100% above
current levels -- is the most
bullish
on the Street, due to "compelling progress toward stronger MSO
subscriber growth."
Shares may quickly move up into the teens if Tivo agrees on a
settlement with Verizon or wins the patent-infringement lawsuit
against AT&T in January. To get shares at the best price, keep
your eyes and ears on this stock, and be prepared to act quickly in
case the company signs a major contract with an MSO in the coming
months.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.