TiVo Is Still Grossly Undervalued

One week ago exactly, TiVo’s (TIVO) stock jumped from $7 to close at $10.70 after their win over Dish/Echostar (DISH) in the Eastern District of Texas Court. You may recall another litigation stock, Tessera (TSRA), which recently had a big win in another venue, the US International Trade Commission. TSRA jumped from $16 to $20 where it drifted for three days before resuming its rise. TSRA then rose from 19 to ~$24 before a follow on event occurred (the Motorola (MOT) License with Tessera) that caused TSRA’s stock to jump to $27.

Tessera’s stock has consolidated at $27 and now appears to be ready to make an assault on the $30 mark.

But the focus of this article is TiVo. Following the sweeping court victory over Dish/Echostar, let’s review how TiVo’s stock has performed and see if there is more room to run.

Since the TiVo’s court win, their stock has had higher lows every day for the past 5 days, and it has set new 52 week highs for four of the past five days, but it is still only at $11/share. Is that a fair value? I think not!!

Just like Tessera’s second and third leg of its rise, both of which I forewarned, TiVo is also ready for another leg up. The analysts’ upgrades are still pouring in. For example, Craig Hallum Capital Group just initiated coverage with a buy and a very conservative $15 target.

In my opinion, most analysts don’t fully appreciate the significance of this ruling which states that the Dish workaround still infringes and it confirms an injunction requiring Dish to disable their DVR functionality. It also allows Tivo to pursue significant additional post verdict damages.

One analyst who understands the size of the damages still facing Dish if they don’t reach a settlement is Sr. Analyst Craig Moffett of Sanford Bernstein, who was quoted in this article as saying,

If Dish loses a current round of contempt litigation related to their alleged ‘work around,’ then the costs to Dish of disabling DVRs, settling with TiVo, or—worst of all—potentially engaging in a bidding war for the right to continue offering DVRs at all, could be in a worst case scenario in the billions… far higher than currently contemplated.

Moffet was quoted in another article saying the court's ruling against Dish “was indistinguishable from a worst-case scenario.”

He noted that additional punitive damages could put the amount Dish is ordered to pay TiVo even higher, and “could potentially even include the disgorgement of profits earned during the period of April 2008 to the present.”

Dish/Echostar are currently in the process of launching a new service called “Sling” this summer. This service has received excellent reviews.

But this recent ruling may delay the launch of Sling, as this Denver Post article explains. Dish (EchoStar) has asked for a stay from the Federal Circuit while they appeal. The Federal Circuit granted a "temporary stay" while they get briefs from the parties, but if the stay isn’t granted, Dish is at TiVo’s mercy as they will be forced to shut down their DVR functionality and pay huge damages for the continued post verdict infringement.

TiVo just submitted their brief requesting that the CAFC deny the stay. It can be found at the bottom of this web site (see TiVo-opposition) and I highly recommend all investors take time to read this response.

The CAFC could ask for a response from Dish, or they could rule at any time . The CAFC has already granted one stay in this case, and they can’t be happy that this case is back for a “do-over”....

I’m sure the CAFC judges thought they had disposed of this case, and when they read the TiVo brief and Judge Folsom’s decision, it is more likely than not that they will deny the Dish stay request.

In the meantime, Judge Folsom has requested damages briefing on the post verdict infringement and contempt ruling. Tivo may be asking for trebled damages from the jury awarded 1.25/box per month, along with additional damages for lost customers while the injunction was ignored.

Additionally, it is possible that Tivo will petition the court for Dish to disgorge their profits made while using infringing DVRs. This case is just starting to get interesting, and, by my estimation, the stock price should be in the 15-18 range soon to more adequately reflect TiVo’s long term value.

I maintain that TiVo is grossly undervalued after this ruling. If Dish and Tivo announce a settlement, which I believe could happen at any time, TiVo’s stock price should quickly rise to $20-25/share. When TiVo has 75% of the available DVR market is licensed, the stock price could easily exceed $50/share.

Disclosure: Long TIVO and TSRA

Comments

[sab63090:]

Excellent comments Nuke! CAFC Docs submitted by TIVO seem to be a killer!

Jun 11 08:21 AM

[HerrKevin:]

Interesting observations. Just to bring a little more information to the discussion, TIVO has had some fairly heavy insider selling lately-almost a million shares in early June after the rise to 11 from various insiders. Even in May when the stock was around $7.60 there were several sales (~300k shares sold along with ~400k on a planned sale).

All that insider selling is a bit of a red light for me, saying that the insiders don't expect to gain much more out of the DISH network situation.

Jun 11 09:21 AM

[rajsekar:]

Nuke, DVR's have become a mainstay for Cable and Satellite TV users. The so called TiVo patent claims are so narrow that other DVR software like Microsoft Media Center, Moxi and Linux based PVR are using features like pausing and reverse live TV feed besides recording. They don't infringe TiVo's patents. TiVo can manage to stop Echostar and that's it. It will take years and lot of money to go after other DVR vendors and cable companies to prove that they violated TiVo's patents. TiVo should have been dead long time ago and this company on basic life support is waiting for someone to buy. You should better read the claims in the Patent ligitation and understand the core technology that is described. I don't see any future for TiVo.

Jun 11 09:26 AM

[Infinitus:]

Best thanks, Nuke.

Very interesting information, especially the part with "Sling", which could be in fact a driver in settlements.

"TiVo said it's waited long enough since winning a 2006 trial and first appeal. "The right to exclude conferred by TiVo's patent is empty if it can never be enforced," TiVo said in a filing Wednesday with the U.S. Court of Appeals for the Federal Circuit in Washington.

Jun 11 09:57 AM

[jim3:]

HerrKevin - you need to read up and understand the 105b-1 rules. I'm sure those sales were pre-planned to trigger when the stock crossed $10.

rejsekar - the software you mention is untested and may in fact infringe. Your comments sound like the typical "Tivo death watch" bashing that has been going on for years. One of the reasons that DVRs have become mainstays for sat and cable users is the availability of Broadcom-based hardware that has been used without license from Tivo (the hardware claims aren't part of the existing appeal, but have been remanded back to the district court for further action). It is very likely that the vast majority of DVRs currently in the field infringe claims of the Tivo '389 patent. You can rest assured that the other players that don't already have deals in place with Tivo will come to the table if this current appeal by Dish is denied, as many expect. They've been along for the free ride on Dish's coattails and that ride is almost over.

Jun 11 11:25 AM

[rajsekar:]

Hello Jim3, sounds like you are a TiVo rep or their founder, Jim Barton. I have analyzed all the patents and their respective independent claims that Jim Barton has authored. I have also used other PVR software - Media Center, Moxi and MythTV. The 389 patent claims are very narrow and I can't argue the infringement in this forum. If TiVo has enough cash let them go after all PVR vendors to prove that their technology infringes 389 patent.

Jun 11 12:49 PM

[rajsekar:]

Hello Jim3, sounds like you are a TiVo rep or their founder, Jim Barton. I have analyzed all the patents and their respective independent claims that Jim Barton has authored. I have also used other PVR software - Media Center, Moxi and MythTV. The 389 patent claims are very narrow and I can't argue the infringement in this forum. If TiVo has enough cash let them go after all PVR vendors to prove that their technology infringes 389 patent.

Jun 11 12:52 PM

[rajsekar:]

Hello Jim3, sounds like you are a TiVo rep or their founder, Jim Barton. I have analyzed all the patents and their respective independent claims that Jim Barton has authored. I have also used other PVR software - Media Center, Moxi and MythTV. The 389 patent claims are very narrow and I can't argue the infringement in this forum. If TiVo has enough cash let them go after all PVR vendors to prove that their technology infringes 389 patent.

Jun 11 12:53 PM

[semi-guru:]

Nuke you make some good points but I think your $50 target is unachievable. I have read your articles on TSRA as well and while you make excellent points on both companies I believe your price targets are much too aggressive. Good article though.

Jun 11 02:33 PM

[rajsekar:]

Nuke/ Jim - Let me give my view point on your $50 price target and "TiVo death watch" bashing. I can say that $15-18 price target is a realistic one for TiVo, if anyone can answer my lingering questions:

1. Why didn't TiVo pursue Rupert Mudoch when he decided to use NDS DVRs instead of TiVo?
2. Why is TiVo not suing Comcast when they are currently distributing Motorola DVR with Comcast logo? Moreover TiVo is working with Comcast and a New England roll-out is already in place.
3. Why is TiVo losing customers and their rising churn-rate every quarter?
4. Can TiVo come out strongly and say that Microsoft, Moxi, MythTV, SageTV, Cisco/SA, NDS, Comcast, Motorola are infringing TiVo's patents and claim royalty?

I owned TiVo shares when they filed the first Echostar patent litigation and for last three years there have been no movement in their share price. The shares have been swinging between $10 and $4.50 since 2006. If TiVo claims that it's a game changer in the media industry, then the stock price and number of customers don't reflect that status. If you are willing to bet your dollars on Echostar ruling, then I am not buying this stock.

Look at the media business wherein big game changers like Google and Apple are battling to retain their uniqueness to customers. When touch based iPhone was introduced in July 2007, Apple fans were drooling in front of posh stores in Palo Alto and New York. The clowns paid $499 to buy an iPhone. Just two years down the road, I can walk into my favorite Walmart and buy a cheap iPhone. Apple can no longer claim any Wow with iPhone. Palm is the latest Wow in the industry. Similarly TiVo was a Wow eight years ago and they have lost the crown. It's too late to predict that TiVo can gain market share and get millions of patent infrigement dollars from other PVR vendors. Also TiVo should have been ruthless like Jacob's father-son duo (Qualcomm founders) to milk wireless carriers over CDMA patents. In the end, Broadcom beat them to death over CDMA patent infringement. Bad Karma, Jacob's.

Jun 11 07:12 PM

[IP Rocks:]

rajsekar: you seem to think that TiVo's decision not to sue a Microsoft has any bearing on the finding that Dish infringed. EchoStar is quite literally growing their customer base off the back of TiVo's patented technology. Microsoft, Cisco and Motorola aren't in the same business at this point. Additionally, they have deep patent portfolios, which would mean TiVo would likely just do a cross licensing agreement. It would put no money in TiVo's pockets, and would serve no market purpose.

EchoStar has been found to be infringing, the patent in question has been reexamined by the USPTO, and the court has said that EchoStar's work around didn't do the trick (frankly, their work around was an embarrassment).

TiVo has been a market-changing innovator, and that kind of innovation should be rewarded.


On Jun 11 07:12 PM rajsekar wrote:

> Nuke/ Jim - Let me give my view point on your $50 price target and
> "TiVo death watch" bashing. I can say that $15-18 price target is
> a realistic one for TiVo, if anyone can answer my lingering questions:
>
>
> 1. Why didn't TiVo pursue Rupert Mudoch when he decided to use NDS
> DVRs instead of TiVo?
> 2. Why is TiVo not suing Comcast when they are currently distributing
> Motorola DVR with Comcast logo? Moreover TiVo is working with Comcast
> and a New England roll-out is already in place.
> 3. Why is TiVo losing customers and their rising churn-rate every
> quarter?
> 4. Can TiVo come out strongly and say that Microsoft, Moxi, MythTV,
> SageTV, Cisco/SA, NDS, Comcast, Motorola are infringing TiVo's patents
> and claim royalty?
>
> I owned TiVo shares when they filed the first Echostar patent litigation
> and for last three years there have been no movement in their share
> price. The shares have been swinging between $10 and $4.50 since
> 2006. If TiVo claims that it's a game changer in the media industry,
> then the stock price and number of customers don't reflect that status.
> If you are willing to bet your dollars on Echostar ruling, then I
> am not buying this stock.
>
> Look at the media business wherein big game changers like Google
> and Apple are battling to retain their uniqueness to customers. When
> touch based iPhone was introduced in July 2007, Apple fans were drooling
> in front of posh stores in Palo Alto and New York. The clowns paid
> $499 to buy an iPhone. Just two years down the road, I can walk into
> my favorite Walmart and buy a cheap iPhone. Apple can no longer claim
> any Wow with iPhone. Palm is the latest Wow in the industry. Similarly
> TiVo was a Wow eight years ago and they have lost the crown. It's
> too late to predict that TiVo can gain market share and get millions
> of patent infrigement dollars from other PVR vendors. Also TiVo should
> have been ruthless like Jacob's father-son duo (Qualcomm founders)
> to milk wireless carriers over CDMA patents. In the end, Broadcom
> beat them to death over CDMA patent infringement. Bad Karma, Jacob's.

Jun 11 09:39 PM

[rajsekar:]

IP Rocks-I don't totally agree with your view. It's right on TiVo's part to sue Echostar for patent infringement and get some kind of royalty for DVRs that they have sold since then. But the bigger issue for TiVo is revenue growth. How do you achieve that with the present model of assemblying hardware and subscribing customers? The economics of DVR has come down to $5 rental for a HD Recorder. Why would anyone pay $15 or so to TiVo for a separate DVR. I was a TiVo user and loved the box and UI, but had to abandon the service when I switched my provider to satellite for economic reasons. I have since gone back to cable and use a generic DVR which satisfies my needs and makes a smaller hole in my wallet. There are millions of users who are in my position and have turned down expensive services like TiVo. TiVo's increasing churn rate is a reflection of this trend. Show me some revenue growth and I can bet on the stock price. There are fundamental flaws with TiVo's business model and they have to be changed.

Jun 12 02:05 AM

[SWS:]

You can not make a comparison between generic dvrs and tivo. There is none. I have a Tivo series 3 and I also have had the generic dvr from Time Warner and also Comcast. The public will finally see this when two things happen. 1) Comcast is going to be rolling out basic tivo service to Chicago shortly and bundle it in their triple play (already out in New England area) and 2) Directv in early 2010 is going to be launching the Tivo HD Dvr for Directv and as part of the agreement will be doing extensive marketing of the product at no cost to Tivo. There is no new technology coming out from Dish, Directv, and Comcast that will replace Tivo's technology over the next 5 years. Additionally, if you currently have a Tivo you would notice the amount of targeted advertising is increasing (without negatively impacting the tv experience) which will bring a new revenue stream similarily to Google search. I think $50 is a crazy estimate but my opinion is that Google or MSFT buys Tivo for $25-30 shortly or Tivo gets to $25-30 on its own within the next 18 months. Comparing a generic dvr to Tivo is like saying a KIA does the same thing as a Ferrari. How many people on Wallstreet have even seen all the functionality of Tivo? People in the Comcast and Directv markets will soon. Disclosure: Long Tivo

Jun 18 10:01 PM

[SWS:]

Lingering questions answered:

1. Why didn't TiVo pursue Rupert Mudoch when he decided to use NDS DVRs instead of TiVo? Everyone thought that their products didn't infringe or thought that they would get away with it

2. Why is TiVo not suing Comcast when they are currently distributing Motorola DVR with Comcast logo? Moreover TiVo is working with Comcast and a New England roll-out is already in place. Comcast agreed to a partnership with Tivo to avoid being sued. Tivo has agreed not to sue them in exchange for a licensing deal.

3. Why is TiVo losing customers and their rising churn-rate every quarter? Tivo cannot compete against the generic infringing DVRs in terms of cost. The big fish stole the techology and marketed it directly to their customers as a cheaper solution. If you have never had a nice bottle of wine and have only had 2 buck chuck then you wouldnt know the difference. This will change now that Comcast will market the Tivo service to all of their customers and so will Directv. Dish will be forced to and then other companies such as Time Warner will either have to sign with Tivo or else replace their dvrs with another techology. Either way Comcast has over 50 million subscribers and Directv over 17 million. Check it out comcast.com/tivo

4. Can TiVo come out strongly and say that Microsoft, Moxi, MythTV, SageTV, Cisco/SA, NDS, Comcast, Motorola are infringing TiVo's patents and claim royalty? This will not be Tivo's approach. Tivo CEO has said that they do not prefer or intend to litigate and will attempt to settle with anyone that is infringing. However, who cares anyways about whether other ones violate at this point when you run the numbers of what Dish will have to pay, Comcast stream, and Directv stream...you easily get a double in the stock price from here within a year or less. The company has no debt and a strong patent for a technology that everyone will be using for at least the next 5 years (at least Directv, Comcast, and Dish subscribers) Disclosure: Long Tivo

Jun 18 10:15 PM

[The Mustang:]

What now for TIVO after court refuses to block remote storage DVR system?

Jun 30 09:09 AM

[Nettligent:]

TIVO has a unique position but it is overvalue, high risk, and too expensive.
Nobody wants to buy product from Tivo and they will do anything to generate revenue including suing its partners and stupid tricks from lawyers.
TIVO is perfect candidate for Short.

Aug 28 05:52 PM