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2006 in Review: TiVo

Fade from black
Horror movies are supposed to scare you. Stocks aren't.

So much for that theory. Few stocks have ever frightened investors more than Motley Fool Stock Advisor pick TiVo (Nasdaq: TIVO  ) did this year. But are you surprised? You shouldn't be; TiVo's 2006 stock story is a tragedy of Greek proportions.

Consider its lawsuit with EchoStar (Nasdaq: DISH  ) . What began as a victory in August retreated to a stalemate in October. That's terrible news for those investors who were depending on TiVo's ample patent portfolio to provide a margin of safety.

Meanwhile, though DirecTV (NYSE: DTV  ) and Comcast (Nasdaq: CMCSA  ) remain partners, it's becoming increasingly clear that TiVo must win more subscribers for itself. No surer path to permanent profitability exists.

Just ask anyone who follows the numbers. TiVo enjoyed 20% sales growth in its fiscal first quarter, thanks mostly to a higher subscription tally and increased licensing revenue. What's more, a court victory had management talking as though every DVR maker would license its software. TiVo's shares surged above $8 a stub.

Enthusiasm bubbled up again in Q2. This time, TiVo beat the Street on the top and bottom lines with sales up more than 50%. Still, churn ravaged the subscriber base. TiVo managed just 30,000 net new additions despite adding 74,000 new TiVo-owned subscribers. Meanwhile, $10 million in rebates crushed hardware gross margins. Investors treated it as a temporary problem and the stock remained above $8.

Then the bottom fell out. First, the courts gave EchoStar breathing room in the patent battle. Then, in its Q3 report, TiVo announced lower-than-expected service revenue growth and a plan to offer its entry-level players free after rebate. Losses, management said, would widen in Q4. The stock fell to less than $6 a share and, as of today, remains there.

Fourth-quarter and full-year earnings aren't likely to be reported before next March. Don't expect miracles when they arrive: TiVo set a high hurdle last year by growing its subscriber base by 45% and services and technology revenue by 37%.

TiVo a no-show for investors
Not that Fools are expecting much from TiVo anyway:

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Source: Motley Fool CAPS

Don't be small-f fooled by the 71.8% bull ratio. Even in CAPS, investors tend to be bullish. With nearly a third of the community opting to shut off TiVo, there's plenty of cause for concern.

Foolish editor Adrian Rush, who goes by TMFSquiggly in Fooldom, best summarizes why bears see TiVo as Aeschylus saw Agamemnon:

"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 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."

The Foolish bottom line
Good points, but Adrian fails to address the financial value of TiVo's patents. Or its widening relationships with Madison Avenue advertising conglomerates such as Interpublic (NYSE: IPG  ) , Omnicom (NYSE: OMC  ) , and WPP (Nasdaq: WPPGY  ) . Such developments suggest that better days are ahead for the DVR pioneer.

But that's the subject of our Foolish 2007 preview on TiVo. Be sure to tune in for that to see what my thoughts are. And in the meantime, if you're looking for superior stock ideas, consider Stock Advisor. TiVo may have fallen short so far, but David and Tom Gardner are still walloping the market by more than 43%. Clicking here will get you 30 days of free access to the service right now. Happy holidays.

Check out the other companies included in "The Motley Fool's 2006 in Review and 2007 Preview" special.

Fool contributor Tim Beyers, ranked 1,436 out of 17,109 in Motley Fool CAPS, still pines for a real TiVo. Why not just settle, EchoStar? Tim owns shares of Interpublic. 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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