If you're like me, then you've grown dependent on a digital
video recorder (
) 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
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:
Motorola division and others. The company that pioneered the DVR,
, 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
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
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
- On July 6,
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
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:
has been expected to be a major customer, though a recent
management change has led Charter to delay those plans for a few
is also now adding to TiVo's subscriber base, although at a fairly
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
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"