To Tivo or not to Tivo
3-15-07: Tivo has achieved a status most companies could only dream about. The company’s name has become a verb. Similar to Google is to search or Xerox to copying; Tivo is synonymous with Television recording. This first mover advantage however has not been as lucrative for Tivo. Despite the impressive subscription growth rate in recent years, profitability has been elusive for this company. Each year it is usually close, but no cigar. Trading near its 52 week low ($5.88), the question here is whether TIVO is a good investment for the long term.
Tivo has been in court over its technology patents for as long as we have followed this stock. To their credit, they recently received a boost back in Octoboer of 2006 when the court ruled EchoStar (DISH) violated Tivo’s patent. As a result, EchoStar might need to pay approximately $90 million. If or when they are finally paid, the stock could also get a boost.
The main problem we see with Tivo is their overall business model. The high start-up cost is a major limitation to its growth. For example, depending on the model of the Tivo you want, it could cost up to $800 plus the monthly subscription fee ($10 - $20 per month). This high start-up cost has kept Tivo’s technology from reaching critical mass (Let’s face it, we watch too much TV anyways and justifying paying such as high cost to the wife could prove to be a hard sell.)
As an alternative, customer can go through a cable or satellite company and get a similar functionality for $5 per month without having to purchase the digital recorder in most cases. We cannot speak for everyone, but paying $5 per month sounds better than forking over several hundred to get a Tivo like functionality. In our view, this is the main reason Tivo has not been able to achieved profitability. While the company has been growing their subscription base, Tivo also needed to cut prices in order to attract customers.
To invest in this company now would be investing on hope more than the fundamentals. This is strictly our honest opinion. We do not own this stock and do not plan to acquire it anytime soon. The hope here a buyout or they will win more cases and be paid for damages and royalty. The first hope seems more plausible, but as far as we know, Tivo has put itself out there for a long time now; so far no deal. The second hope, we would not hold our breath as the legal system is too cumbersome.
Bottom line, we would not recommend buying Tivo as there is no business catalyst that we can see that will drive this stock higher. The valuation opportunity does not exist even though it is trading around its yearly low. Finally, we hate to see folks putting their hard earned money in a stock and hoping something will happen when we all know the fundamental issue here is their overall business model.
