TV As We Know It Is Dying -- Is This Stock Next?

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In America, television is an institution -- but at my house, neither of my teenage sons have much interest in it.

I've told my sons about how, when I was young, nearly everyone spent a good deal of their free time watching TV despite the small number of channels available. At my house, we have a "smart" TV with hundreds of channels -- but my sons say they find TV boring, as do all their friends. 

On occasion, they'll watch a sporting event or another program, but overall there is zero interest in the electronic box that captured my generation's imagination. The scripted, non-interactive nature of television holds little attraction for today's youth, who have grown up with the Internet and various forms of digital entertainment.

Because I'm always thinking about how to profit from new trends, I wondered whether my sons' opinion was signaling the death of television. What my research found has led me to firmly believe that TV viewership is on an irreversible downward slide.

While the collapse of this cultural institution will be slow, I have identified a side play to this decline that I think will continue to suffer, creating an ideal short investment.

Before I get to this stock, it's crucial to note that despite declining viewership levels over the past several years, the stock prices of the major media companies like Disney (NYSE: DIS) and CBS (NYSE: CBS-A) have risen dramatically over the same time.

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DIS Chart

Although the retracement may have recently started, declining viewership has not hurt the stock prices so far in the leading names. If viewership is plunging, why have traditional media stocks soared?

This disconnect appears to be directly tied to increased revenue from higher rates for advertisers and subscribers alike -- but this model is unsustainable. A shrinking audience means advertisers will get less bang for their buck, which means they'll be less willing to pay the high rates charged by media companies. This will likely lead to a drop in their revenue, as well as their stock prices.

Based on the evidence, the gravy train is over for these traditional media companies. I expect the downtrend to continue slowly over the next decade.

 

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  The headwinds of the dying TV audience will simply be too harsh to overcome. It doesn't matter how great a company's numbers are or how strong its patent stable is when the business it is built upon is dying.  
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With this said, there is a company in the TV business that I think makes a solid short right now: the digital TV recording company TiVo (Nasdaq: TIVO). While not directly in the TV business, TiVo relies on the shrinking TV audience for its survival.

Founded in 1997, TiVo is known for developing the first commercial digital video recorder. It has a market cap of $1.4 billion and $1 billion in cash on hand, and posted revenue of just over $406 million last year. The company also just announced a record 4.5 million subscribers. In addition, talk of a potential buyout by Netflix (Nasdaq: NFLX) has buoyed shares a little off of $11.50 support. However, TIVO has lagged well behind the broader market over the broader market over the past 52 weeks with a 2.8% gain.

No doubt, TiVo has a decent balance sheet. (Indeed, my colleague David Sterman has long been bullish on the company.) However, the headwinds of the dying TV audience will simply be too harsh to overcome. It doesn't matter how great a company's numbers are or how strong its patent stable is when the business it is built upon is dying. It is equivalent to being the best at making wagon wheels -- right before the advent of the automobile.

Risks to Consider: While I expect TiVo to lose half its value or more within the next 18 months, a buyout or other bullish event could occur. In addition, while the downward trend is evident, no one can estimate exactly when TV will reach the point of being unprofitable. I am 100% convinced this will happen, but it's impossible to time. Always use stop-loss orders and remember that shorting has its own risks.

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Action to Take --> Short shares on a daily close below the support line of $11.50 or on another bounce touching the $12.25 line. I recommend stops just above the 200-day simple moving average at $12.57 for both potential entry levels. I expect to see TiVo trading in the $5 range within 18 months.

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