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TiVo (Nasdaq: TIVO  ) reported second-quarter results Wednesday night. Come Thursday, it was hard to tell whether the stock was stuck in fast-forward or rewind mode.

Share prices jumped as much as 4.7% in after-hours trading, but then plunged as much as 6.7% when regular trading resumed. Why the whiplash action?

The maker of digital video recorder hardware and software reported $54.1 million of revenue, just below Wall Street's median estimate at $54.2 million. But a non-GAAP loss of $0.23 per share came in a penny stronger than the analyst consensus. This was a wash in terms of pure numbers.

Word on the Street
And it's not like the analyst herd ran for the exits. Two firms reiterated their buy ratings on the stock on Thursday morning. Brean Murray Carret kept its price target at $14 per share, while Janney Montgomery Scott lowered its ideal price from $13 to $12.50. Even so, $12.50 would be a 38% gain from current levels, so that slight adjustment shouldn't inspire any mass sales.

Moreover, both firms underscored their theses that pending legal actions will provide catalysts for the stock. TiVo either won or settled on favorable terms in every intellectual property suit over the past couple of years, and there's more to come. The next case to close should be the Verizon (NYSE: VZ  ) FiOS one in October, with Google (Nasdaq: GOOG  ) unit Motorola Mobility going to trial in the spring of 2013 and Cisco Systems' (Nasdaq: CSCO  ) Scientific-Atlanta division a few months later.

Brean Murray reminds us that there's big money at stake: "Total claims in these cases are believed to be in excess of $1 billion." For a company with about $50 million in quarterly sales, that's huge.

The sell-off is most likely some simple profit-taking. TiVo had climbed 19% in the six weeks leading up to this report. Plenty of investors may have placed their sell orders while the stock was spiking, without setting price limits or paying a premium for after-hours trades. TiVo generally trades on decent volume, but not in after-market action. And it's a heavily shorted stock, so nerves can be a little jangly when things get exciting.

Wait -- don't you hate patent lawsuits?
I'm not a big fan of litigation as a business model, but I own TiVo because it's a special case. Service providers and makers of set-top boxes saw TiVo bursting on the scene in the early 2000s, loved the idea of all-digital replacements for VHS tapes, and refused to cut the original inventor in on their DVR-fueled profits.

It's not like the smartphone arena, where the model that gets all the credit for sparking a revolution was really just a smartly designed and brilliantly marketed improvement on a plethora of less sophisticated models. But without TiVo, the digital video revolution would have started many years later -- if at all.

These guys deserve the credit, and the window to exploit the DVR phenomenon is closing fast. TiVo is making an effort to stay relevant in a purely digital entertainment future, but will need every last penny of available DVR revenue in order to afford the next step.

TiVo must make its digital moves very quickly, lest Netflix claims a global monopoly on the digital video market. To help you understand why we're so excited about digital video in general and Netflix in particular, we've created a premium report on Netflix. Along with an in-depth analysis of the company's current challenges and market opportunities, you'll even get a full year of updated insights from our top analysts. All this is yours for about the same price as a month of Netflix service. Click here to get started!

Fool contributor Anders Bylund owns shares in Netflix and has also created a bull call spread on top of his shares. He also owns shares of TiVo and Google, but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Netflix and Cisco Systems. Motley Fool newsletter services have recommended buying shares of Google and Netflix. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (1) | Recommend This Article (4)

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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 August 31, 2012, at 3:59 PM, constructive wrote:

    "TiVo either won or settled on favorable terms in every intellectual property suit over the past couple of years"

    If everything is going right for you in the courtroom yet you're still losing money, there's obviously something wrong with your business model.

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