TiVo Inc. (TIVO), a leading provider of technology and services for DVRs, offers a subscription-based service that enables consumers to record, watch and control live television.
The inconsistency in results, lack of profitability, falling revenue and margins and conservative guidance indicates that the stock will perform below the market. With falling margins, we do not expect the company to become profitable in the next several quarters. With negative earnings and falling revenues, we initiate the stock at Underperform.
TiVo’s third-quarter results fell substantially from the prior-year quarter and missed the Zacks Consensus Estimate. Despite an improving spending environment, the company provided lower-than-expected guidance. Management expects a higher net loss in the range of $13 million to $15 million in the fourth quarter of 2010 due to higher R&D and litigation expenses.
The company faces intense competition in the DVR market from Comcast Corp. (CMCSA), Cox, DirecTV (DTV), Dish Network Corp. (DISH) and many others. Thus increasing competition from cable and satellite providers is eroding its subscriber base and leading to market share losses.
Aggravating the situation is the competitive offerings from Comcast and Cox. Further in the satellite business, Dish Network offers a range of DVR models at lower monthly service fees than TiVo.
Although we believe that TiVo has been hit by the recession, it held up better than most companies that depend on discretionary consumer spending.
A growing DVR market will benefit TiVo. The company estimates that approximately 29 million households had DVRs in 2009, which is expected to increase to over 57 million by 2012. Further, we expect growth in broadband video to trigger growth in DVR technology. Thus the growth in DVR technology will directly bolster growth at TiVo.
TiVo is taking significant steps to gain a strong foothold in the growing array of media technologies by entering into many strategic alliances. The company believes that it can regain market share through software-DVR partnerships.
Although TiVo has entered into new partnerships, we don’t expect the incremental benefit to come from these partnerships in the near-term. Further, TiVo’s long-standing patent infringement dispute with Dish Network, formerly known as EchoStar Corp. (SATS) remains an overhang.
Accordingly, our six-month target price of $8.50 is based on a target P/B of 4.5X (below the industry average of 5.2X) our estimated book value of $1.88 per share at Jan 30, 2010.
Read the full analyst report on “TIVO”
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Read the full analyst report on “DTV”
Read the full analyst report on “DISH”
Read the full analyst report on “SATS”
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