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| Shares of TiVo have slumped during the past year but took off on Tuesday following the announcement of a deal with Comcast. |
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NEW YORK (CNN/Money) -
The demise of TiVo, it turns out, may have been greatly exaggerated.
There was a lot of doom and gloom about the company's prospects leading up to its latest earnings results last week. After TiVo reported and hinted that it might not pursue new subscribers for its digital video recorder service as aggressively as it had, investors punished the stock, pushing it down 13 percent.
But on Tuesday, TiVo (Research) fans cheered the company's surprise announcement that it entered into a partnership to provide its technology to cable giant Comcast (Research). TiVo shares surged more than 50 percent.
The biggest knock on TiVo was that it was facing intense competition from cable companies pushing their own DVR cable set-top boxes.
In addition, TiVo's biggest strategic partner, satellite TV provider DirecTV (Research), announced last year that it would soon begin to sell boxes with DVR technology made by NDS Group (Research) a sister company.
The Comcast deal eases some of the concerns caused by those threats.
"Everyone was expecting that TiVo's DirecTV business would ultimately go to zero. The Comcast partnership is a big offset to that," said Rob Sanderson, an analyst with American Technology Research.
Good deal...but at what cost?
But what impact will the deal really have on TiVo? Financial terms of the agreement were not disclosed in the press release and a TiVo spokeswoman would not comment further about the financial details when reached by CNN/Money.
Comcast said that a TiVo product for its customers would not be available until mid- to late 2006. Comcast also said it would just be using TiVo software, but not a TiVo box.
"Comcast is not using all of TiVo's technology," said April Horace, an analyst with Janco Partners, who questions how much the deal will add to TiVo earnings.
TiVo currently receives about a $1 per month in ongoing fees from DirecTV subscribers who signed up for a TiVo package. But both Horace and Sanderson said they doubted that Comcast agreed to pay anything higher than that.
"People will start dreaming big with Comcast," said Sanderson. "But I'm not sure the economics of this deal will be favorable to TiVo."
Horace added that since TiVo is developing new software for Comcast, she'd want to know how much, if it all, Comcast will be reimbursing TiVo for research and development costs.
The Comcast partnership is also not an exclusive one, so it's not as if TiVo has necessarily scored a big victory over its rivals. In fact, Comcast announced last week that it would be buying $1 billion worth of cable set-top boxes from Motorola (Research).
Profits are still on pause
However, Daniel Ernst, an analyst with Hudson Square Securities-Soleil, an independent research firm, argues that even if a small fraction of Comcast's subscribers sign on to the TiVo service, that could be a positive for the company. After all, Comcast has 21.5 million cable subscribers.
"Even at a nominal fee and small penetration, TiVo could easily generate $20 million to $30 million to help juice the marketing of its stand-alone product," said Ernst.
Still, several analysts said that investors should be wary of TiVo following its huge move on Tuesday, given that the deal doesn't change near-term fundamentals that much.
TiVo is expected to report a loss of 28 cents a share this fiscal year, which ends in January 2006. That follows a loss of 99 cents a share last year. TiVo has yet to report a profit in its history.
And while the consensus forecast for fiscal 2007 calls for TiVo to earn 19 cents a share, not all analysts are convinced that TiVo will make it into the black that year. Estimates range from a loss of 13 cents a share to a profit of 70 cents.
"The stock deserves to go up a bit on this news but in the absence of any economic terms, it's a big guess about how significant this is. I'm not sure if this deal is enough to justify the new stock price," Sanderson said.
For more on personal technology, click here.
Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies.
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