On Tuesday after the market close, the appellate court announced that they are staying the injunction order issued by the previous Texan court during the entire appeal process by Dish. As a result, Dish is now able to continue their DVR service during the appeal process which is expected to last another 12 to 18 months. In reaction to this news, the stock tanked more than 10% on Wednesday. Speculators who had hoped for the quick overturn of the stay and quick settlement with Dish was disappointed and bailed out of the stock, creating selling pressure.
In reaction to this news, Bear Stern analyst downgraded the stock from market perform to market underperform, citing uncertainty associated with the appeal process (I could not find out his adjusted target price on the stock). S&P analyst also downgraded the stock from strong buy to buy due to prolonged litigation process. He cut the target price to $8 from $10. On the other hand, Smithbarney analyst reiterated buy rating on the stock, commenting staying the injunction is an extremely common process during the appeal process and should not come as a surprise. In addition, the firm maintains the target at $14.5. The analyst at Smithbarney noted $10 is the enterprise value of the company while $4.5 is the value associated with eventual positive outcome of the litigation against Dish. Hence, without the litigation, there still is a significant upside for Tivo.
I noted in my previous investment thesis that the stock will be highly volatile until the litigation process is resolved. I would also like to emphasize that staying the injunction in no way portends that Dish has the upper hand during the actual appeal process. It is rather common to temporarily halt the injunction order while the appeal court now decides whether previous Texan court decision that favors Tivo is valid and should be enforced against Dish. Although the speculation premium has dissipated last two days, you will get them all back and more, should eventual litigation outcome favors Tivo.
One thing that Dish did get out of the staying the injunction during appeal process is extra time to develop alternative DVR solution that can bypass Tivo patents. However, even they come up with their own solution, they need to then replace all existing 4 mil affected DVR and the cost could be prohibitively expensive. To me, it would simply make more sense for Dish to license Tivo technology and pay small license fee per month rather than spending several billions of dollars upgrading all the affected DVR.
While we had bad news on the litigation front, Tivo announced on a same day that they have crossed license the patents with IBM. Smithbarney speculates this announcement as a prelude to new product announcement related to either brand new form of portable media device or movie downloading device onto the Tivo platform. While this news was largely ignored over the litigation setback, I think Tivo continues to have very innovative products that help the company to gain firmer traction in the DVR market space. With possible revenue boost coming from Series 3 DVR just released last month and Comcast DVR deployment that is set to start soon, I continue to speculate with Tivo on a long side.
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