Should You Love or Hate TiVo?

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

TiVo (NASDAQ: TIVO) is both loved and hated on Wall Street. The DVR pioneer's unusually high proportion of shorts think shares have only risen because of the broader market's rally, while longs think the stock has more room to rise on its own merits. As you'll see below, one of these factions has much better odds of being proven right.

Ominous signs

TiVo’s largest revenue stream is its direct-to-consumer DVR service. For many years, TiVo’s technology was light-years ahead of the competition. However, TiVo rested on its laurels instead of constantly innovating, improving, and expanding. With more consumers opting for other DVR services, TiVo now finds itself falling behind industry trends.

Due to rising competitive threats, TiVo's R&D costs have increased. Couple that with ongoing losses and management's uncertainty of future profitability, and TiVo seems far from a safe investment. Last year, TiVo reported a net loss of $5.3 million, and it expects Generally Accepted Account Principle (GAAP) losses to continue for Fiscal Year (FY) 2014.  

“We have incurred significant net losses, and we may never achieve sustainable profitability,” management said. According to the company, TiVo must also make more money or spend less in order to avoid running out of cash. 

Competitive threats

TiVo faces formidable competition from Comcast (NASDAQ: CMCSA), DirecTV (NASDAQ: DTV), Dish Network (NASDAQ: DISH), Time Warner Cable, Apple, Google, and more. 

If a small technology company creates a great product and succeeds, it’s often only a matter of time before larger companies come along, steal the same concepts, and crush that smaller player. Unfortunately, TiVo wasn’t savvy enough to find ways to innovative and form enough partnerships in order to avoid this pattern. TiVo instead took its rivals to court, which has helped the company generate revenue, but TiVo can’t rely on this approach forever. 

Comcast's marketing budget and enormous reach could make this year's impending launch of its X2 -- a hard drive capable of saving 150 hours of high-definition content -- a serious threat to TiVo. The X2 accesses programming from a multitude of devices through the cloud, accepts voice commands, and offers customers flexible pricing based on the content they watch. 

DirecTV’s Genie offers different types of features, including the ability to watch five shows at once on only one box, three times more recording capability than cable, and being able to watch shows from up to five weeks back.

Dish’s Hopper allows customers to watch live and on-demand television from anywhere, and you can record up to six shows at once. Dish also offers 24/7 customer service, which makes it unique in the industry. 

With certain TiVo models, you can record up to four shows at once, and you can record a season of a TV show with a Season Pass. But you can't go back to watch shows from five weeks back, like DirecTV's Genie. And unlike Dish, TiVo offers only limited customer service hours.

All four of these companies have seen consistent top-line growth, but only Comcast and DirecTV have been consistent on the bottom line, whereas TiVo -- like Dish -- has not. Comcast looks to be the safest option of the bunch; DirecTV has seen the domestic market mature, and increased competition has made its prospects in Latin America look dimmer than they once did. Comcast is also the only company of the four that pays a dividend, currently yielding 1.70%. 

Potential for TiVo

Despite all the tailwinds, a glimmer of hope exists for TiVo. The company has tapped the smartphone and tablet market with new products and apps for Android-based systems and iOS. Users can search, browse, schedule, and share shows, without interrupting what they're watching.

TiVo is also forming distribution agreements in different markets overseas. TiVo is looking to expand in the United Kingdom, Australia, Mexico, New Zealand, Spain, Sweden, and Taiwan. In the last quarter, Virgin Media added 172,000 TiVo subscribers (total now 1.5 million), and Spain’s ONO added 166,000 subscribers, which was a 68% increase over three months earlier. 

All of this might sounds promising, and it has the potential to lead to stock appreciation in the near future. However, it’s only a matter of time before the rest of the world catches up with more advanced technologies.

TiVo acquired TRA Global (advertising efficiency company) last year, which is now called TiVo Research & Analytics. TiVo is looking to grow in this area, and it points out that it’s currently capable of measuring television viewership and commercials more accurately than Nielsen Media -- on a second-by-second basis, as opposed to Nielsen's minute-by-minute data. Those specific insights could make TiVo more attractive to advertisers. 

If you’re long and looking for more good news, TiVo plans on buying back $200 million worth of shares over the next two years. With close to $571 million in cash, TiVo can afford the buyback, but it's likely just a short-term solution for buoying the stock price. 

Conclusion

TiVo is falling behind on the technological front, and since the majority of its revenue comes from its DVR service, this is bad news. Overseas expansion presents near to medium-term potential, but it’s not likely to be sustainable without significant innovation. And any innovations would come at a steep cost. Management seems to be concerned about future prospects and sustainable profitability. Based on that fact alone, you should consider staying away from TiVo. 


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends DirecTV. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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