TiVo Gets a Big-Name Buyer

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When big-time investors talk (with their money) the rest of us listen. But just because we listen doesn't mean we should always follow their lead because they're going to make mistakes just like the rest of us.

This week, well-known hedge fund Citadel Investment Group disclosed it had taken a 5.3% stake in digital video recorder maker TiVo (Nasdaq: TIVO  ) . Yes, that's the same TiVo that reported a loss per share that tripled from last year to $0.30 per share.

So what is Citadel doing buying a company that has issues up the wazoo? There are a few things Citadel may be thinking.

TiVo's IP is more valuable than anyone else thinks
TiVo is an intellectual property company if nothing else. The company has 196 patents issued and another 371 applications outstanding. And TiVo has been rigorously litigating competitors it thinks are infringing.

TiVo has patent infringement lawsuits outstanding with EchoStar (Nasdaq: SATS  ) , Verizon (NYSE: VZ  ) , AT&T (NYSE: T  ) , and Microsoft (Nasdaq: MSFT  ) , along with counterclaims outstanding for the last three. Not exactly a great list of enemies. But winning these cases can be lucrative, like when TiVo won a case against EchoStar in 2008, which paid out $104.6 million.

At the very least, Citadel must think the expense TiVo is incurring to prosecute and defend these cases will be worth it and there will be some upside in the future.

But as with any legal spat, there is downside risk. DISH Network (Nasdaq: DISH  ) is also suing TiVo in another patent infringement case. Citadel's lawyers must be pretty confident in the merits of all of these cases because litigation is getting awfully expensive and the opposition has very deep pockets.

Buying at the bottom
TiVo shares reached $10.97 earlier this year and after plunging to below $9, there must be some value to be found, right? On closer look, I'm just not seeing it. Price/sales is 4.8, price/book is 6.2, and earnings are negative, so P/E ratio doesn't tell us anything. None of those ratios are terribly attractive, and to top it off sales are falling, gross margin is declining, and both SG&A and R&D costs are on the rise. I'm not seeing any value here. In fact that's a case to short the stock, not buy shares.

And a turnaround doesn't seem imminent either. TiVo is losing subscribers and recently announced terms of a debt offering to pay for litigation, R&D, and other purposes. Taking out debt to sue rivals sounds more like a Hail Mary pass than a well-executed business plan.  

Looking for a buyout
Of course, Citadel may think Apple (Nasdaq: AAPL  ) will take my suggestion to buy TiVo to pump up the Apple TV. At least that's this Fool's dream.

There could be some prospect of a buyout, but buying a money-losing company because you think it will be bought out is a risky proposition for investors without influence (aka you and me). Still, it isn't out of the question, and with IP more important than ever in the tech space, that may just be what Citadel is hoping for.

This is the most plausible reason I can find for Citadel to make such a big bet on TiVo.

Should we follow Citadel over the cliff?
As Mom always said, "Just because your friends jump doesn't mean you should." I don't know what Citadel's motivation is for this purchase, but I'm not seeing any flashing BUY signs here. Unless Citadel thinks there's a buyer waiting for TiVo, the patent litigation and worsening financials are enough to scare me away.

Would you follow Citadel and take the jump into TiVo? Leave your thoughts in the comments section below.

And be sure to add TiVo to My Watchlist to find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Microsoft is a Motley Fool Inside Value pick. Apple is a Motley Fool Stock Advisor choice. The Fool has written puts on Apple. Motley Fool Options has recommended a bull call spread position on Apple. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2011, at 2:58 PM, 5mackDab wrote:

    Apple is rightfully arrogant. As much sense as it may make to buy out TiVo, I see them growing in the space organically with the ridiculously popular Apple name all they have to do is put a bit more effort and resources in and they'll takeover the space as usual.

  • Report this Comment On March 25, 2011, at 3:33 PM, thecherryz wrote: needs to edit their work and take out pieces like this. Look at the En Banc case to see why the potential value is there.

  • Report this Comment On March 25, 2011, at 5:09 PM, vrex008 wrote:

    Look at the insane options actiivity on TIVO, as well as the last share price spike to $18 when they won their court case (before appeal) and you can see the absolutely huge speculation on the court decision about to be released. The company has been totally devastated by the patent infringements, but remains a black box to evaluate until they gain control of their own patents - or lose control. The $125,000,000 raised is for unknown purposes, and it is the Fool author's speculation that this is for legal fees. That may not be correct. It just as well might be R&D expansion. Also, that money was raised at 4% interest (plus future share conversions), and that is a GREAT rate. Somebody gave them CASH for PAPER, and that is a bullish sign. So in summary, we do not know what is going on at TIVO, only that a huge amount of money is betting on something big happening before August, and probably end of May.

  • Report this Comment On March 25, 2011, at 5:32 PM, cfrdog wrote:

    If you want to be early to the party, you buy now. If they win this case it sets a precedent for the others. Tivo will then reap royalties from the crooks who stole their technology. I don't think Apple and Google have anything worth buying in the TV space. Sure generic DVRs are good enough and cheaper but this will change once all DVR's are essentially TIVO's (branded or not). The entire company can and will turn around once this case is won. I agree with you if you take this case out of the picture but its kind of hard to ignore the benefits of a win.

  • Report this Comment On March 25, 2011, at 6:00 PM, mattack2 wrote:

    Even though people complain that "the Tivo UI hasn't changed in a decade", it's *still* far superior to other DVRs.. with no monthly fees (when you pay lifetime), and you own it.

    Yes, I wish there were more tuners... But only a few other DVRs have more tuners (actually, the new Tivo in UK has 3).

    Why hasn't anyone else caught up, much less past them, in actual usability of the product?

  • Report this Comment On March 25, 2011, at 11:42 PM, davidstecko wrote:

    The author of this article needs to do more research and Motley Fool should be more selective in what's published. While not guaranteed, TIVO is likely to be awarded HUNDREDS OF MILLIONS in the DISH/EchoStar lawsuit. That award may come soon (very possibly within the next month). When TIVO won another round in this lawsuit in March 2010, its stock immediately shot up from $9 to $17. Although DISH surprisingly was granted an en banc REVIEW which reversed this gain, it is very likely TIVO will ultimately prevail. That is OBVIOUSLY what Citadel is banking on. And it's a wise choice.

  • Report this Comment On March 27, 2011, at 3:48 AM, LarsFromMars1958 wrote:

    Apple Tivo is a good idea. Tivo should win in court and soon. TIVO Radio is another idea who's time has come.

    My departed father was a rocket scientist, then a Patent attorney which gave me insight into TIVO a long time ago and I have been rooting for them for many years now. In fact, I just put my money where my mouth is and bought $1000 worth of 12.50 call options on speculation the the supreme court will do what is right and rule in Tivo's favor soon.

    Every inventor and I have known some great ones, will be watching. If patents are not protected, there is no longer any incentive to invent.

    From my prospective, the integrity of the court itself is at stake here. If they do not rule for TIVO, my faith in the American Justice System will be shattered.

    As for TIVO and APPLE, I thought of that years ago and I love the idea. My Tivo and my Iphone are two devices that have changed my life for the better. They save me time, increase productivity, and generally improve our quality of life. People like me actually get emotional and "love" their products. Millions of Americans are sitting on their couch right now with 5 remotes and filled with frustration hoping for a better way. Tivo and APPLE TV can solve this problem for the benefit of us all.

    And finally, a word about TIVO radio.

    Have you ever heard the news, weather, or traffic on the radio and said to yourself, "What did they just say?" It happens to me all the time and I look at my radio and imagine a little Tivo pause/rewind button which would let me hear it again. Some say they already have it with Sirius radio, but I'm not willing to listen to Howard Stern, or pay too much just for the rewind feature. This simple Tivo patented device could, and should be on every radio. This brings to mind one of the principle's of patent infringement. TIVO's Time warp pausing of live TV is their contribution to science and industry and humanity and they should win because they invented for use in television. But what about radio? If someone else comes up with tivo radio first, and even deliberately copies tivo's time warp technology, they might win in court because it will be used for radio...a different application.

    This is food for thought and a gentle reminder to tivo to please produce a very simple 5 minute flash memory for radio before someone else ( like apple) does.

    GO TIVO and thank you for improving my life.

  • Report this Comment On March 27, 2011, at 10:05 PM, TMFFlushDraw wrote:

    Thanks for the thoughts.

    I still hear a lot of "if's" in the investment thesis. And IF a positive ruling were guaranteed it would already be priced into the stock.

    I agree that a positive ruling is something Citadel is likely banking on but I still maintain that it's a risky bet for retail investors who don't know what's going to happen for sure.


    Actually the use for legal expenses was stated by the company, not my speculation.

    Travis Hoium

  • Report this Comment On March 28, 2011, at 11:31 AM, rdutyuyt wrote:
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