Is TiVo Toast?

TiVo's (Nasdaq: TIVO  ) perpetual losses are becoming tiresome, even for longtime bulls like Foolish friend Rick Munarriz. But I can't blame him. TiVo must find a way to get more than 53% of its subscriber base to contribute to recurring revenue. Otherwise, the digital video recorder (DVR) pioneer may never reach profitability.

Yet some participants in the Motley Fool CAPS community-intelligence database see a bright future for TiVo:

Metric

TiVo

Total ratings

349

Bullish ratings

251

Bull ratio

71.9%

Bearish ratings

98

Bear ratio

28.1%

Bullish pitches

84

Bearish pitches

23

Data current as of Dec. 1, 2006.

Could they be right? Let's consider a pair of the highest-rated pitches, one bullish and one bearish. First, the bull.

Tune in TiVo
Top of the heap among Professor Positives for TiVo is Scott Schedler. The president of The Motley Fool is known as TMFScott in Foolish parlance. His pitch has thus far received 14 recommendations:

OK...so this is a flyer in that I typically like to see companies make money before I buy. Having said that, here's what I see:

  • Everyone I know (including my father) using TiVo as a verb
  • Service & Technology revenues growing at almost 40%
  • Favorable litigation rulings that will facilitate more licensing revenue and less competitive threats
  • 24 and The NBA Playoffs...important appointments at my house that would be made easier by TiVo.

Much as I hate contradicting the guy who holds sway over my paycheck, I have to point out that service and technology growth declined to 22% in the most recent quarter. That's still impressive, of course, but it's not even within spitting distance of 40%, which may be a concern for some.

Nah, turn it off
Speaking of concerns, our leading Sally Sourpuss when it comes to TiVo is Hozer02, who earned three recommendations for this criticism:

The product is great, but delivering it has been a struggle ... Current legal issues hamper it's short term, but if it survives, [TiVo] can become a good company...

Not satisfied? Me neither. Let's mix in some more bearish commentary, this time from Foolish editor Adrian Rush, who goes by TMFSquiggly in these parts:

TiVo may have become a verb, but that doesn't give it any advantage. In fact, that can work just as easily against a product if the brand name becomes a generic expression. Kleenex and Thermos used to refer to specific brands; now they're just catchall descriptors for everything of their type. When you Xerox something, it's probably not on a Xerox. And by the same token, I can TiVo something on a DirecTV (NYSE: DTV  ) DVR. Lots of people do. And there's the problem. Anyone can play this game, and there's hardly any barrier to entry. I'm not sold on the whole DVR concept, either. Give me some removable media for permanent storage of the stuff I record, and we'll talk.

Ouch! But Adrian has a point. We have two DVRs from EchoStar (Nasdaq: DISH  ) here in the Beyers household. I'd love to have TiVo instead, but I'd rather not switch to DirecTV or Comcast (Nasdaq: CMCSA  ) . There's too much hassle involved.

A patently Foolish view
Yet none of that keeps me from remaining bullish when it comes to TiVo's shares. Why? Patents. TiVo has more than 100 of them, primarily related to the workings of DVR technology.

Its patents in this area have thus far stood firm in the face of legal scrutiny. More good news came Monday, when a judge denied EchoStar's request for a new trial in the ongoing patent-infringement imbroglio.

TiVo earlier won a $74 million jury award and an injunction against the sale and use of EchoStar DVRs. A temporary stay of that ruling is now in place, pending a full appeal. Nevertheless, it seems to me increasingly likely that some sort of settlement will take place, and that DVR royalties will be paid to TiVo.

How much? Do the math. Roughly $41 million of the damages to be awarded to TiVo were for unpaid royalties on four million DVR boxes sold by DISH Network. That assumes a fair rate of $10.25 a box.

Take this a step further, and we can value the patent. Researcher Carmel Group says that there are 15.6 million DVRs in operation today. TiVo has four million subscribers, so let's assume that 4.4 million of these are TiVo-branded boxes, for which there would be no royalties. That's still 12.2 million players. Multiplied by $10.25, that's $125 million that could find its way into TiVo's coffers today.

Better yet, Carmel says that half the viewing public -- or roughly 50 million households -- will own a DVR by 2010. Assuming TiVo does no better than double its subscriber base over the same period, that's a potential royalty stream of $422 million.

The Foolish bottom line
And that's from one patent. TiVo also owns the patent for mixing TV signals and the Internet, which could prove to be important for delivering video on demand. What's that worth? $100 million? More?

We don't know, of course. But isn't it fair to add the relative value of TiVo's DVR patent and its cash? If so, TiVo's bottom-of-the-barrel asset value is $528 million, a 6% premium from today's market value. A private equity acquirer could pay at least double that, and maybe a lot more, considering how much money is available.

There's simply no doubting that TiVo has been an underperformer. It could take years for the business to completely transform itself. By the same token, a meteor could hit my house. Neither statement changes the fact that TiVo's assets appear to be undervalued -- perhaps by a very wide margin.

So let's just call TiVo what it is: a very interesting informed speculation that the market is mostly ignoring. You, however, may want to tune in.

TiVo is aMotley Fool Stock Advisorselection. Ask for us an all-access pass, and you'll get a backstage look at all of the stocks that are helping David and Tom Gardner beat the S&P 500 by more than 43% as of this writing. It's free for 30 days.

Fool contributor Tim Beyers, ranked 1,918 out of 14,569, still pines for a real TiVo. Why not just settle, EchoStar? Tim didn't own shares of any of the companies mentioned in this story at the time of publication. Get the skinny on all of Tim's stock holdings by checking his Fool profile. The Motley Fool's disclosure policy lives in prime time.


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