With the U.S. stock market hitting new multi-year highs, I have added a handful of shorts to the portfolio I manage on Wealthfront as a hedge against mostly long exposure. This is despite the fact that I am not a huge fan of shorting. The odds are stacked against you when you bet on falling stock prices (stocks go up 80% of the time in any given year), and I find the task pretty difficult relative to finding attractive long candidates.
The most likely reason for this, as a value manager, is my tendency to focus on valuation. The price of a a stock relative to its financial position has a very large influence on long term performance, but much less so in the short term. Since most high valuation stocks have lots of momentum, shorting them can be a tricky strategy to master. Still, sometimes I dabble in shorting and try to limit my downside by taking fairly small individual short positions.
All of that is a long winded way of bringing up TiVo (TIVO), the pioneer of the personal digital video recorder (or DVR), which is one of the small shorts I have included in the Wealthfront portfolio. I wanted to share my view on the company and also seek input from my readers, who tend to have good insights into the world of technology. As a result, I would be curious if you would agree with my thesis that TiVo, as a provider of set top box recording technology, could very well become obsolete in the not-too-distant future.
While doing research, I found TiVo to be a pretty interesting story. First, the company has been shrinking in size for years, which I found odd. Revenue in 2007 was $273 million, which was followed by $250 million in 2008 and $238 million in 2009. Results for 2010 have not yet been released, but the consensus forecast is for another decline in sales, to $168 million. Although only one metric, I was thinking I might be on the right track after seeing their historical revenue data, even though they are shifting from a direct subscriber model to a licensing comapny, which does bring in less money.
However, if TiVo isn’t growing now and hasn’t been for several years, I am hard pressed to be optimistic for the future. And just as an aside, TiVo has not been sacrificing unprofitable sales in recent years in the name of earnings growth. The company has been losing money over this entire time period. In fact, losses in 2010 are expected to jump to 72 cents per share, versus a loss of just 23 cents in 2009.
My fundamental argument against TiVo is based on what appears to be in the technology pipeline right now. I can’t help but think there will be a shift away from set-top boxes that house hard disk drives on which consumers can record television shows. The cable companies have really expanded their libraries of on-demand shows and movies and companies like Netflix (NFLX) (and now, perhaps Amazon (AMZN)) are mastering the streaming model where the data is accessed remotely from a cloud computing enviroment. It is true this video content will be sitting on hard drives somewhere, it just seems likely to be in a data center somewhere, not inside set-top boxes in our living rooms.
Not only is competition fierce and making huge strides, but content companies like HBO have discussed bypassing the Amazons and Netflixs of the world to offer a streaming service directly to their existing paying subscribers. And just imagine what kind of streaming television service Apple (AAPL) might unveil in the next couple of years. Wondering if Amazon can eat into Netflix’s 20 million subscriber base is one thing, but I can certainly envision Apple coming up with a superb and efficient way to view on-demand television and movies to complete head on with first-mover Netflix and any content producer that tries the direct route.
How would TiVo boxes fit into this marketplace? I don’t see how they could in any big way. How could TiVo differentiate itself and provide value to users with all of these other, larger companies innovating as they surely will. Sure consumers can bypass commercials with their TiVo boxes, but content companies hate not being able to show ads (that is, after all, how they make enough money to create and produce their content), so it seems logical they would push the on-demand and streaming models. As a consumer it will be much easier to watch my favorite programming if I don’t have to worry about setting up my TiVo box to record something, or monitor how much storage space is left on my box's hard drive.
In closing, I really don’t see a future for TiVo, but I don’t hear a lot of investors echoing the same sentiment. Maybe the company just flies under the radar because it is small, isn’t profitable, and sees its revenues decline year in and year out. Still, in that scenario I think it is quite an attractive short candidate. At over $10 per share, the company is valued at a whopping $1.25 billion despite being expected to lose $84 million in 2010, on less than $168 million in sales.
Disclosure: I am short TIVO.