TiVo Is Clearly Undervalued

| About: TiVo Inc. (TIVO)

It's a rare when a company develops a product that is so cutting edge that it actually becomes a verb. People often refer to their recording of TV programs as TiVoing (NASDAQ:TIVO). Many of these same people are actually using a digital recording device provided by their cable provider that is not actually a TiVo product. But now TiVo is partnering with cable providers to help them differentiate their products. This new business model is working and TiVo showed subscriber growth in the MSO/broadcaster category in the second quarter.

According to TIVO's 2010 10-K,TiVo is:

a leading developer and provider of software, hardware, and services that enable a comprehensive entertainment experience by unifying disparate content sources including live television, Internet video, and Video on Demand services offered by major pay television providers in a single, easy, intuitive user experience.

On September 7, TiVo unveiled the Premiere Elite set-top box. The device offers four digital tuners and a two-terabyte hard drive. Essentially this means that users can record up to four shows at the same time while watching a fifth; it can save up to 300 hours of content, eliminating the annoyance of running out of recording room and being forced to delete saved shows. The Premiere Elite also seamlessly combines both broadband and broadcast entertainment through a single interface. Users can navigate network television, Netflix (NASDAQ:NFLX), Pandora (NYSE:P), Hulu Plus, etc.

On September 8, TiVo and Virgin Media (NASDAQ:VMED) announced details of an iPad (NASDAQ:AAPL)app allowing Virgin Media customers to use their Apple iPads to interact directly with their TiVo service to search across Virgin Media's content, including TV Guide and thousands of hours of content available through its video on demand library, without interrupting what they are already watching on TV. With just a couple of swipes on the iPad, a user can immediately begin viewing the content they have discovered via their TiVo app on their TV.

At 10.90 per share, TIVO has a market capitalization of $1.5 billion and an enterprise value of $1.1 billion.

The best way to think about the value of TiVo is a sum-of-the-parts analysis. The components of TiVo’s value include balance sheet cash, the present value of the future settlement payments from Dish (NASDAQ:DISH) ($33mm per year from 2012 to 2017), the present value of TiVo’s deferred tax assets (subject to a section 382 limitation in a change of control), TiVo’s intellectual property and the potential settlements from ongoing litigation, and the value of TiVo’s core business, which is growing again.

Valuation Component


Per Share Value

Net cash


PV of Dish Payments (5% discount rate)


Deferred Tax Assets (5% discount rate)


Intellectual Property


Core set-top box and software business


TiVo is worth $6.20 per share, almost 60% of the current price, without ascribing any value to TIVO's intellectual property or TIVO's core business. Given the recent focus on IP including Google’s (NASDAQ:GOOG) acquisition of Motorola Mobility (NYSE:MMI) for its patents, and other IP maneuvers from the likes of Apple and others, is it clear patents can have significant value? With respect to TiVo specifically, the Dish settlement of $300mm up front plus $33mm per year for six years sets a bar for TiVo’s other current litigation. Further, TiVo has value in its core business. This is not just an IP play. Putting all the pieces together, it seems clear that TiVo is worth far more than $10.90 per share.

Disclosure: I am long TIVO.