In the land of high tech, the company that comes up with a great idea isn't always the one to ultimately get rich from it. That was a painful lesson learned by TiVo (TIVO). Although it pioneered the digital video recorder (DVR) technology, other companies eventually copied the intellectual property and began offering their own lower-cost DVRs to customers. TiVo cried foul, noting that key patents were infringed upon. Few took note, as it seemed to be a case of sour grapes.
Yet TiVo refused to give up, eventually initiating a series of major lawsuits against Dish Network (DISH), AT&T (NYSE: T), Verizon (VZ) and others. At the time, few thought TiVo had much of a chance in the courtroom. Its legal foes simply had too much money in the bank, and would financially exhaust TiVo through a series of legal delays and appeals.
TiVo persevered, eventually scoring major settlements. In early 2012, TiVo agreed to receive $215 million in minimum payments and a cut of subscriber fees from AT&T, and then completed a similarly sized settlement with Verizon in September 2012. In each instance, TIVO shares went on to post impressive three-month gains as investors began to look ahead to the next legal settlements.
Well, investors are now faced with a timely trading opportunity as the company gets ready for its next major trial. If recent history is any guide, TiVo and its new adversaries will look to settle (and score big cash payouts for TiVo) before the trial gets under way.
In the past, TiVo has gone after the cable TV providers, but held off challenging the companies that actually knowingly built TiVo's intellectual property right into their hardware (or at least that is what TiVo alleges). Now, TiVo is gunning for this bigger prey, pursuing lawsuits with Cisco Systems (CSCO) and Motorola Mobility, which is now a division of Google (GOOG).
Though few analysts want to factor further legal victories into their profit forecasts, many of them note that the fact that Verizon and AT&T have chose to settle with TiVo increases the likelihood that Cisco and Motorola will acquiesce and take the same path.
As analysts at Barrington Research recently noted, "TiVo seems well-positioned to state its case in several outstanding litigation actions that have been combined in a process that should move toward closure in late spring of 2013."
These analysts have a price target of $16 for TiVo, though they don't bake legal victories into their models. That prediction of almost 40% upside from current levels is based on an increasingly bullish view of TiVo's existing DVR business, which has been steadily growing as new mid-tier global cable firms sign up for the company's technology. A recent article in Fortune magazine neatly summarizes the company's newfound operational momentum.
Regarding the Google/Motorola case, a jury is expected to be selected later this month with plans to go to trial in early May. If there is a settlement in this case, it may be just weeks away.
The Cisco trial won't get under way until the first half of 2014, although a legal settlement may be concluded well before that date, especially if Google/Motorola blinks and decides to settle. Cisco would be facing long odds in the courtroom given TiVo's successful track record with other litigants.
Perhaps with an eye toward further legal gains, hedge funds such as Citadel Investment, SAC Capital Advisors and Leon Cooperman's Omega Advisors have been acquiring TiVo stock in recent quarters, according to gurufocus.com.
TIVO shares have slipped roughly $1 in recent weeks, perhaps in reaction to underwhelming near-term guidance. Yet that pullback may prove to be short-lived.
"While April quarter revenue guidance came in below the Street due to revenue recognition timing issues, management expects July quarter revenue to benefit significantly, making up for the shortfall in April," note analysts at Goldman Sachs (GS), who have a $15 price target.
Shares may reach that price target fairly quickly if TiVo announces another legal victory in coming weeks.
Risks to consider: Shares may take a hit if investors that were counting on an imminent legal settlement get shaken out by a decision to go to trial. Use a stop-loss in case the market gets choppy or investors respond poorly to news that the two sides have decided to pursue a costly and lengthy trial.
Recommended Trade Setups:
-- Buy TIVO up to $12.50
-- Set stop-loss at $10.50
-- Set initial price target at $16 for a potential 28% gain in three months
-- Buy TIVO May 12 Calls for $0.65 or less
-- Do not use a stop-loss
-- Set initial price target at $2 for a potential 208% gain in one month