Street Patrol
Recent articles:
• Coke could add life to your portfolio, 8/23/2005
• The Gap has lost the young and hip, 8/19/2005
• Home Depot is no fixer-upper, 8/16/2005
More...
| | Street Patrol
Investors should skip TiVo
Losing a key partner (DirecTV) is bad enough; now, the company is embarking on a wrong-headed strategy.
By Robert Walberg
Almost everyone I know that owns one, or has ever used one, loves the TiVo digital video recorder. The ability to rewind a show that you are watching -- while that show continues to record in real time -- is just plain cool.
But cool technology doesn't automatically translate into business success -- just ask the folks behind Betamax, 8-tracks and Zip drives. If TiVo (TIVO, news, msgs) wants to avoid being yet another technology dinosaur, it must map out a long-term strategy and then stick to it.
Unfortunately, TiVo has a history of changing its strategy about as often as Jennifer Lopez changes partners. News of another shift hit the stock hard after Wednesday's earnings report. Apparently unsatisfied with the path that brought the company to its first-ever quarterly profit, management announced that it will pursue an aggressive marketing and incentive program in an effort to drive subscriber growth.
It's a mistake that will drive the company's shares even lower in coming months.
Submarining subscriptions
The subscription trends don't look good. Though total subscriptions in the second quarter grew by 254,000, that was down from 288,000 in the same period last year. Net subscriptions (new subscriptions minus dropped subscriptions) rose by 40,000 in the quarter, down from 63,000 in last year's second quarter. The drop in the rate of growth is due to increased competition and a reduced focus on marketing.
TiVo has also lost a key partner, as DirecTV (DTV, news, msgs) recently announced that it would no longer exclusively market TiVo to its 14 million customers. The satellite company will now promote digital recorders built by NDR -- one of its sister companies. The move is sure to hit TiVo hard.
More from MSN Money
In light of the decline in subscriber growth rates and the more competitive playing field, you can almost understand why management is choosing to forgo profitability now to increase its long-term subscriber base. But TiVo should have stayed the course and focused on achieving sustained profitability.
The cost-ignoring rush for subscribers is a hopeless endeavor that will only push the company deeper into the red. It's no different than the auto industry giving away the store in an effort to drive short-term sales, all the while conditioning customers to expect ever lower prices. Margins and profits are bound to suffer in the long term.
Fading prospects for sustained profits
Even with deep discounts and aggressive incentives, the reality is that subscription growth will continue to decline due to tougher competition and less favorable relations with key partners. The company knows it. It was disingenuous of management to indicate that it will no longer forecast subscription growth because it has "very limited control going forward over the marketing efforts and priorities of DirecTV."
Did the company ever have control over the priorities of DirecTV? No. What it did have was a friendlier relationship that is now on the rocks. Management doesn't want to have to give guidance on numbers that it knows will spook investors.
As if it weren't bad enough that management routinely flip-flops on how to run its business, it's now practicing the art of doublespeak. No matter what you think of TiVo as a technology, the above combination should turn you off on the stock.
Instead of focusing on driving subscription growth, management should improve operating efficiencies and seek alternate revenue sources. The company has had limited success with either of those goals over the years, although it had just begun to demonstrate that it understood how to build the business for the long-term. It was the promise of sustained profits that spurred the stock's 33% gain over the past 52 weeks.
Without the hope of profits, investors will now shift their focus to the competitive threat and to the management missteps. That's not good news for a stock that ran up big on hype rather than substance. Down big in after-hours trading, look for TiVo's stock to record additional losses in the weeks and months to come. A return to the mid-$3 area is not only possible, but probable.
Stock pick
With that in mind, Ill add the stock as a short to my Street Patrol picks portfolio. Well track it and see how it goes from here.
| |
|
|
|
|
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
|
