Tivo: buy the pessimism and sell the optimism.

Tivo, one of the speculative stocks, covered in FilthyRich stock list reports earning after the market close tomorrow (Wednesday 29th). Tivo appeared to have finally established steady uptrend in the middle of this year after winning the patent litigation against Dish Echostar. The company won the injunction, which ordered the immediate termination of the service of the DVR that infringed on Tivo patent. However, after the stay of the injunction by the appeal court, investor's hope that Tivo may leverage the court win to strike many additional business deals with the cable providers slowly deflated. And at $6.28, the stock is now trading at the lower end of the trading range between $6 and $8.

Heading into the earning, Tivo have low expectation in my opinion. Investors now know that the patent litigation won't resolve in the near term and may last longer than a year. Because DVR service deployment with Comcast and Cox is still some time away, investors now expect that net sub add this Q will be minimal. Also investors expect heavy operating loss as the company has recently launched new HDTV DVR platform and there could be significant hardware subsidy cost. Also heading into the holiday season, investors expect more expense coming from the more aggressive marketing campaign. In my opinion, risk to award ratio for Tivo has turned favorable as investors do not put too much expectation on the company's performance this Q.
There could be some mild positive surprises this Q. Surprise may come from higher than expected sales Series 3 HDTV DVR. There are many avid existing Tivo DVR users and they may have upgraded their DVR to new Series 3 DVR. This may resulted in higher than expected revenue. In addition, I have noticed from alexa.com that the traffic to tivo web site in the middle of Sept has spiked to the near record level. This time frame coincides with the introduction of the new series 3 and the initial sales by the new subscribers may have been also greater than expected. Another positive surprise may come from ad revenue. Although they are very small part of the overall revenue at this point, the margin is really good for this line of business. Along with continued tight expense control, Tivo may be able to deliver upside surprise in the bottom-line (loss is expected due to higher than expected expense associated with new product launch).

Tivo is heading into seasonally the strongest Q of the year. As such, I expect that the company will be optimistic about sub add aspects this winter. In addition, Comcast deployment will start early next year, solidifying the sub add outlook. Also the management may picture more enthusiastic stance on the ad business. Today Tivo announced that the company is going to add targeted commercial at the end of the recorded TV programs and measure the commercial viewing by the people. These factors could serve to boost the share price after the earning.

Unless Tivo gets positive outcome from the appeal litigation process, the stock is likely to be kept in the trading range between $6 and $8. However, heading into the earning with reduced expectation, I see a little trading opportunity. If you consider squeezing out 5 to 10% upside from Tivo, I think buying ahead of earning may be the play. If this really pans out, make sure you do take the profit.

Good luck,