Covering the Tivo Short

I’ve decided to cover my short position in Tivo (TIVO) a little earlier than expected. The stock was trading at $12 per share last year when it became fairly obvious that cable giants like Comcast (CMCSA) were not going to partner with Tivo, but rather build proprietary DVR technology into their own digital set-top boxes. This development left little room for Tivo to differentiate itself enough to outdual the cable companies in providing a soon-to-be standard feature.

With the premise that Tivo’s fundamentals were going to be in steady decline, and profitability was years off (if ever in the cards), covering the short wasn’t something I was really considering. However, with today’s announcement of Tivo’s 3 millionth subscriber, I once again found myself looking at the stock’s valuation. After a precipitous drop from $12 to $3 and change, the time has come to take my profits off the table.

The financials are still pretty ugly. Sales for 2005 are expected to be just under $200 million, with a net loss of approximately $25 million. Tivo has boosted marketing expenses recently as it realized that its partnership with DirecTV will become less and less valuable over time. As a result, it wouldn’t surprise me if sales come in ahead of expectations this year, but losses are higher than anticipated.

The losses are less of a concern given that Tivo has little debt and a sizeable cash position. Further funding may be required later on, depending on how well increased marketing spend boosts sales and its impact on margins, but for right now the company is okay financially.

With the stock up 5% on the subscriber figures, the market cap is about $300 million, or about $100 per subscriber. This valuation seems to be very reasonable to me, and I have a tough time making the case it should be lower than that. As a result, today I am moving on to bigger and better opportunities.

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