Why I'm Buying 600 Shares of this Well-Known Stock

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If you're like me, then you've grown dependent on a digital video recorder ( DVR ) for your evening's entertainment. The ability to store hours of my favorite shows -- and access them instantly -- was only hinted at when video-tape recorders (VCRs) were first introduced in the 1980s. 

But as it often happens in the land of high-tech, the company that comes up with a great idea isn't always the one to ultimately get rich from it. These days, you can find DVRs made by Cisco Systems (Nasdaq: CSCO ) , Google's (Nasdaq: GOOG ) Motorola division and others. The company that pioneered the DVR, TiVo (Nasdaq: TIVO ) , has become something of an afterthought for investors.

You can understand why. TiVo's technology has been so widely copied, that key customers such as DirecTV (NYSE: DTV )  began to flee. Sales peaked at about $270 million in fiscal (January) 2008 and have never reached that level again. Equally damming, TiVo has lost money in six of the past eight years. More recently, the company has seen cash fly out the door, as it pays an army of lawyers to pursue several important legal cases.

Yet, all of that may soon be in the past. TiVo is turning the corner on several fronts, and with a few small breaks, this fallen tech star could see its share price move up sharply in coming quarters. I want to own this stock before these catalysts hit the tape, which is why I'm adding this fallen tech star to my $100,000 Real-Money Portolio .

TiVo has a fairly complicated recent history, which I explained in detail last December. Please be sure and read that as a backgrounder as I'll be updating the company's progress from there. Incidentally, I predictedshares might rise 50% at the time, and they eventually gained 25% during the following two months before giving back those gains. I still see 50% upside -- or more -- as I'll explain in a moment.

A very busy 2012
In recent years, TiVo has suffered from subscriber declines. But since 2012 began, that trend has reversed. The company has also made progress on the legal front. Here's what has transpired thus far in 2012:

  • On Jan. 4, the company announced a legal settlement with AT&T (NYSE: T ) that alleged patent infringement. TiVo will receive a series of payments through 2018, totaling at least $215 million.
  • On Feb. 23, TiVo announced that it had added a net new 234,000 subscribers to its service in the fourth quarter of 2011, and on May 28, TiVo announced first-quarter net adds of 206,000 subscribers.
  • On July 6, Verizon (NYSE: VZ ) withdrew a key legal claim in its fight against TiVo, leading analysts to slightly boost their view of a legal victory for TiVo, which could exceed $300 million. The trial is set to begin in October. (Similar legal action is expected to proceed against Motorola next spring and Cisco Systems in the fall of 2013).
  • On July 16, TiVo paid $20 million to acquire TRA, a consumer research firm that combines point of sale and other consumer-purchasing information with TiVo's viewership data to measure ratings and advertising effectiveness. The move hints at future plans as an e-commerce enabler and as a source of demographic data to cable company partners. (TiVo announced plans to work with Ebay ' s (Nasdaq: EBAY ) Paypal a month earlier to facilitate online transactions.
  • On Aug. 29, TiVo announced that it had added 230,000 net new subscribers to its service during the second quarter, leading the company to raise forward guidance.
  • At this point, investors are focused on two key issues: Can TiVo keep expanding its subscriber base? And will TiVo prevail in those upcoming lawsuits?

On the subscriber front, the outlook is quite bright. Much of the recent subscriber growth has been driven by the U.K.'s Virgin Media and Spain's ONO. Here in the United States, Charter Communications (Nasdaq: CHTR ) has been expected to be a major customer, though a recent management change has led Charter to delay those plans for a few quarters. Comcast (Nasdaq: CMCSA ) is also now adding to TiVo's subscriber base, although at a fairly modest pace. 

It's the Charter relationship that bears watching. The recent management change at Charter helps explain why shares of TIVO have pulled back from their recent peak. As analysts at Brean Murray note, "Thedelta is Charter, which could put TiVo on a path to 10 million subs (up from a current 2.7 million), but may take longer than expected to begin ramping." The delays with Charter apparently stem from a decision to reduce the hardware needs at the cable customer's home and instead deliver as much functionality as possible over the Internet. Translation: TiVo now looks to be a key software supplier to Charter and less of a key hardware supplier.

Why would Charter and others choose to go with TiVo's somewhat pricier technology? Because TiVo is now spending more than $100 million year to bring a wide range of advances to the DVR platform, such as "stream anywhere" capabilities and interactive advertising. Most cable operators aren't spending that kind of money, and are starting to slip behind in terms of set-top box functionality.

But the biggest catalysts for this stock are the pending lawsuits. TiVo's legal standing looks strong, as evidenced by the early 2012 legal victory in its settlement with AT&T. As mentioned, the Verizon suit could represent $300 million in damages, while victories against Motorola and Cisco could bring the full tally up to $700 million. TiVo already has around $400 million in net cash in the bank, and taken together with these settlements, you're almost at the company's current $1.2 billionmarket value .

Assuming TiVo is able to boost its subscriber base to four million by 2014, that business would likely be worth roughly $600 million (or $150 per subscriber), by my math (using the netpresent value of long-term subscription revenues). Taken together, these all value TiVo at around $1.7 billion, or about 40% above the current market value.

The Downside Protection -->   If TiVo loses these lawsuits, then you are simply looking at the core business and the cash balance, which as noted, are likely worth a collective $1 billion, or around $8 a share. That's a likely floor for this stock.

Upside Triggers -->  The first lawsuit is expected to commence in about a month, though if the AT&T case is any precedent, a settlement could come quickly. (AT&T refused to settle, until it looked like the trial was going to happen). A positive outcome against Verizon, either in court or as a settlement, could lead Cisco and Motorola to not bother pursuing their own costly legal fights. So while these legal issues are expected to take up to 18 months to resolve, resolution could come a lot sooner.

Action to Take -->  I will buy 600 shares (or roughly $6,000 worth) 48 hours after you read this. I also suggest investors put in a stop loss at $8, though I will not be deploying the stop-loss limits myself. Shares can be bought under $12.


-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of GOOG, CSCO in one or more if its "real money" portfolios.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Basics , Investing Ideas

Referenced Stocks: CSCO , DTV , DVR , GOOG , TIVO

David Sterman

David Sterman

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