Why is Billionaire Steve Cohen Building his TiVo Inc Stake?

SAC CAPITAL ADVISORSBillionaire Steven Cohen’s SAC Capital Advisors is one of the most prestigious hedge funds around. The fund has returned nearly 30 percent annually since its founding, and its top holdings as of June 30 include Ensco PLC (NYSE:ESV) and Murphy Oil Corporation (NYSE:MUR) (you can view the fund’s portfolio here). In a recent 13G SEC filing, SAC Capital disclosed a sizable 6.46 million share stake in TiVo Inc. (NASDAQ:TIVO). This represents an increase of about 4 million shares since June 30.

This stake is valued at about $61 million, which is still a smallish fraction of SAC’s $20 billion in assets under management. The 13G filing occurred as SAC went over 5 percent ownership in TiVo. Since the beginning of the second quarter, TiVo Inc. shares have declined about 20 percent, and the stock was trading at over $12 in February. The analyst consensus has TiVo generating $226 million in revenue in the present fiscal year (FY 2013) and about $260 million next year (FY 2014). However, these numbers could be conservative in the event of continuing success in patent litigations, as noted below.

Based purely on fundamental indicators, TiVo shares appear richly valued. Its price/sales multiple is presently around 4.5, which is certainly not cheap for the sector; DIRECTV (NASDAQ:DTV) and DISH Network Corp. (NASDAQ:DISH) both have a price/sales of around 1. The company’s history of maintaining negative cash flow also makes it a somewhat riskier investment, especially considering the relatively narrow DVR market that it serves.

As of the end of April, TiVo had about 2.4 million subscribers, of which only 1.1 million were subscribers to the stand-alone TiVo system. Over 1.3 million TiVo customers subscribed via the multiple system operators (MSOs) such as Comcast Coporation (NASDAQ:CMCSA). This MSO market is expected to undergo a fair amount of growth in the near-term, and S&P estimates show TiVo having nearly 4 million subscribers by the end of 2014. So, given the relatively rich pricing, Cohen seems to be making a growth pick here.

Due to the growth of DVRs freely available to customers from a number of MSOs, TiVo has some work to do in differentiating its service. Services like broadband multi-media video and radio, special blow-by-blow advertising metrics, and mobile services continue to be major assets for the company. Set-top boxes are essential for any cable package, and TiVo—the grand-daddy of the DVR—stands to be very competitive in bidding for these services. For example, Scripps Networks Interactive, Inc. (NYSE:SNI) has signed a deal with TiVo to gain access to its advertising data regarding on auto sales. Management at Scripps Networks Interactive believes this will help correlate auto sales with various advertising campaigns.

Another event-based revenue stream for TiVo comes from its patents. The company’s revenue stream has been propped by a number of rulings; the company has been awarded about $700 million in lawsuits with AT&T Inc. (NYSE:T) and Dish Network Corp. On October 1, TiVo will begin more litigation with Verizon Communications Inc. (NYSE:VZ) over yet more patents. JP Morgan has upped TiVo to overweight partially over these patent cases; the firm expects damages of about $200 million, plus monthly licensing fees, to be awarded next month. Even among the number of successful patent infringement cases from a number of technology companies over the past year, TiVo’s patents stand out as among the most resilient.

Assuming courtroom success and modest subscriber growth, TiVo makes an interesting way of playing MSO growth. The company beat analyst estimates for second quarter earnings, registering a $0.23 loss as opposed to an estimated $0.24 loss.

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