Video compression software developer DivX
Founded in 2000, DivX writes software that squeezes high-quality video into relatively small movie files. Over the past four years, users have downloaded more than 180 million copies of the DivX codec (short for "compression/decompression"), including 50 million in the past 12 months. The company's online video player had 15 million downloads, and the DivX.com site gets about five million unique visitors per month.
DivX software helps power DVD players, digital cameras, and portable media players, and roughly 70% of the company's total revenues comes from licensing fees from hardware device manufacturers. The company also licenses DivX technologies to software companies, and gets fees from advertisers and companies such as Google
DivX is benefiting significantly from the growth of digital media. From 2004 to 2005, its revenues increased from $16.3 million to $33 million. As of the first half of 2006, revenues increased from $14 million in the year-ago period to $27.2 million. The company posted a profit of $5.9 million in its most recent fiscal year.
Despite its promising numbers, DivX also carries several major risks. Adobe
DivX's customers are also heavily concentrated, with ten licensees accounting for 48% of revenues. According to the DivX prospectus, many of these agreements will expire in 2006 unless they're renewed. The Google deal alone accounts for roughly 20% of DivX's total revenues.
DivX is also moving into user-generated video with its portal site, Stage6.com. Web video is already a crowded market, with YouTube, MySpace, Google, Microsoft, and Yahoo!
While its growth will likely continue, DivX's stock is far from cheap. Assuming that the company posts revenues of $70 million and profits of $15 million this year, the stock would be trading at nine times sales, with a P/E of 41. That's a lot to pay in light of the various risks. Fools seeking a play on the media revolution might instead consider a firm like RealNetworks, which has a more diverse product line, less customer concentration, and a much more reasonable valuation.
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Fool contributor Tom Taulli does not own shares of companies mentioned in this article.