Tune into TiVo ...

11/05/2004 12:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

TiVo, which allows consumers to record TV programs directly to a digital video recorder, is a new favorite of Ian Wyatt. For those aware of the high risks of investing in emerging technologies, he offers the following as a play on the future of digital home entertainment.

"TiVo (TIVO NASDAQ) is a provider of technology and services for digital video recorders (DVRs). DVRs have become increasingly popular in recent years. A DVR plugs into a cable box/satellite and television, and allows the viewer to record television directly to the DVR's hard drive. The TiVo service allows a viewer to do much more than simply record a television show to a hard drive for replay at a later time. It allows consumers to pause, rewind, play an instant replay, and play in slow motion a live or previously recorded broadcast. Viewers can program the TiVo to record specific shows at specific times, or alternatively to record every occurrence of a given show.

"However, TiVo's real business is not in the sales of DVRs, but rather in subscription revenues it generates each and every month from its 1.9 million subscribers. We believe TiVo's strong brand recognition is indicative of the company's superior product and service offerings when compared with competing DVR services. TiVo has partnered with Hughes, Phillips, RCA, Samsung, Toshiba, and Pioneer for the manufacturing of TiVo enabled DVRs. The company's main distribution comes from satellite television provider DIRECTV, as well as nearly all well known electronics retailers, and directly from the company.

"The bullish case for TiVo is based on strong subscriber growth, top brand status, extensive intellectual property, advertising sales opportunities as subscriber numbers scale, and the company's leadership position in the DVR service space. TiVo's subscriber growth has been impressive. The company ended fiscal 2003 (ended January, 2003) with 624,000 total subscribers. Subscribers more than doubled to 1,332,000 at January 2004, and current expectations call for roughly 3 million total subscribers by the end of fiscal 2005 ending January of 2005. It is clear that TiVo is firing on all cylinders in order to grab as much market share as possible at this early stage of the DVR market. Additionally, an unwarranted decline of 50% to TiVo's share price makes the company incredibly attractive at current valuations.

"The bearish case for TiVo is based upon an existing relationship with DIRECTV that is up for renewal in 2007. A cancellation of the agreement could have a negative impact on subscriber growth after 2007. In addition, while TiVo is the clear leader in the DVR space, the company is beginning to see increased competition from the cable companies, which are currently developing their own DVR products to be used with their cable boxes. We expect cable companies to continue rolling out their own DVR services, but expect that TiVo will maintain its significant market share by offering a superior service with additional features over the generic competition. It is no surprise that TiVo has an extensive intellectual property collection, with 61 foreign and domestic patents.

"While we have concerns about increased competition from cable operators, and the long-term stability of the DIRECTV relationship, we believe that TiVo will continue to ‘own’ this market and offer a compelling service for consumers, and opportunity for investors. We believe the market opportunity for TiVo is huge, despite increased competition with the cable companies and a deal with DIRECTV that might sour. The potential market for TiVo's product is huge, not only in the US, but also abroad. The company is clearly in the early innings of this developing market, and offers a superior product to generic DVRs. Shares of TiVo are priced well below what we consider to be a fair value. We are initiating coverage of TiVo with a buy rating and a 12-month share price target of $15. We believe TiVo represents an outstanding investment opportunity for growth-oriented investors."

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