Wall Street hits pause on TiVo

NEW YORK (CNNMoney.com) -- TiVo has been caught in a tug of war this year with investors alternately hitting the fast-forward and rewind button on the volatile stock.

Shares of the digital video recorder company are up 23 percent this year. But the stock has fallen about 34 percent since hitting a 52-week high in April.

Most analysts think TiVo has the best DVR technology...but that hasn't been enough to keep cable and satellite firms from gaining customers with their own DVR offerings.

TiVo investors have been on a roller coaster ride in 2006.

Before TiVo (Charts) reported mixed results on Wednesday, several Wall Street analysts said it might be wise for investors to stay on the sidelines and wait for firm evidence that the company may finally be on the path to profitability.

TiVo reported healthy gains in sales for its fiscal third quarter. Service and technology revenue increased 22 percent to $52.6 million. But that was below the $54.7 million analysts were expecting.

In addition, TiVo warned that service and technology sales in the fourth quarter would be about $54 million to $55 million, lower than Wall Street's estimates of $61.2 million. Shares of TiVo fell about 3 percent in after-hours trading on Wednesday following the earnings release.

The company also continues to lose money. TiVo reported a loss of 12 cents per share, lower than the 15 cents a share analysts were predicting.

For the full fiscal year, which ends in January, analysts expect TiVo to lose 60 cents a share. And Wall Street is forecasting another annual loss the following year as well.

Analysts said that much of the run in TiVo's stock earlier this year was fueled by a favorable legal ruling in a patent infringement case with satellite TV firm EchoStar (Charts) regarding TiVo's DVR technology.

But outside the courtroom, analysts said, TiVo remains a company stuck in pause mode. Investors are waiting to see what will help jumpstart the company's sales and subscriber growth again ... and get TiVo to finally generate a profit.

Analysts say the biggest reason to steer clear of TiVo for the time being is that the company has not provided many details regarding the planned roll-out of TiVo services by cable companies Comcast (Charts) and Cox.

Both cable firms have agreed to offer TiVo-products to their subscribers. Those product launches should begin sometime in 2007.

This, in theory, is great news for TiVo since the company has struggled to gain subscribers lately due to competition from many cable companies that offer watered-down versions of digital video recorders to their subscribers.

In addition, analysts said partnering with cable companies could mean that TiVo would generate more revenue from licensing its software and other technology as opposed to the cut-throat business of selling actual DVR boxes.

But the company has not given Wall Street much information about when Comcast and Cox will start making TiVo services available, how the offerings will be marketed, how much they will cost cable subscribers and what type of cut TiVo will get from the cable companies.

"Most investors are interested in what's going on with the cable companies - what the pricing structure will be like and how quickly the companies will roll out the service. That's the big question mark," said Mark Harding, an analyst with Maxim Group.

And until it becomes clearer when TiVo can expect to see meaningful revenue from its cable partners, Wall Street remains wary, especially since the company won't be able to rely on DirecTV (Charts) for new subscribers much longer.

The satellite TV firm and TiVo have an agreement that expires in February 2007 and DirecTV will no longer market TiVo to its customers. Instead, DirecTV will offer a competing DVR box, made by sister company NDS Group, to its subscribers.

DirecTV has agreed to provide maintenance and support for customers with TiVo for three more years, however. But losing DirecTV as a means to gain new subscribers could hurt TiVo since DirecTV customers currently account for nearly two-thirds of TiVo's 4.4 million subscribers.

"The company is stuck in a transition period. DirecTV subscribers are on the decline since it will stop marketing and offering TiVo to new customers and it's too early to expect any help from Comcast or Cox," said Frederick Moran, an analyst with Stanford Group.

For this reason, TiVo is stepping up its efforts to add new services that will make its DVRs stand out. In particular, TiVo is embracing the broadband video market to try and cash in on the popularity of online video sites, such as YouTube, which was recently bought by Google (Charts) for $1.65 billion.

Analysts raved about new TiVo services, unveiled earlier this month, which will allow users to download videos from the Web and play them on their TV set. TiVo also announced a deal with broadcaster CBS. TiVo owners will be able to watch original Web content from various CBS (Charts) properties, including CBS.com, CBSSportsline and Innertube, on their TV.

"I am actually pretty impressed with what they are doing online," said Maxim Group's Harding. "Whether that's a reason for customers to keep or add TiVo remains to be seen but that does provide them a source of differentiation from other generic DVR boxes."

Still, another analyst said investors shouldn't get too excited about the online video initiatives.

Michael Kelman at Susquehanna Financial Group estimated that only about 500,000 of the company's subscribers will be able to download video from the Web to their TiVo since the service is only compatible with the company's most advanced Series2 and Series3 boxes.

"TiVo is spearheading a lot of innovative features and functions but I'm not sure if any of this content will be much of a driver of subscriber growth just yet," Kelman said.

Stanford Group's Moran agreed that the demand for something this advanced just might not be there and that one problem for TiVo is that cable companies are able to win customers by merely offering bare-bones DVR products.

"TiVo has the most state-of-the-art and innovative DVR products on the market so for those looking for incremental services like Internet-related videos, you really must focus on TiVo," he said. "But the bulk of DVR growth will come from people who want basic DVR services and as a result, the generic offerings from cable and satellite operators are gaining market share."

In addition, analysts said TiVo's new broadband video service will not work with Flash technology, which is what YouTube and many other online video sites use to stream video on their sites. So that could also limit its appeal to fans of Internet video.

TiVo is also trying to boost revenues by working more closely with advertisers. Many companies have been obviously wary of TiVo because it allows TV watchers to fast forward through commercials.

But TiVo announced a new feature Tuesday that will allow companies to insert ads at the end of recorded programs. The fact that TiVo is partnering with marketers could alienate some subscribers, said Alan Bezoza, an analyst with Oppenheimer & Co.

"It's a tough business right now. TiVo is trying to add value to advertisers but consumers are not going to buy TiVo products because of advertising," he said.

At the end of the day, analysts said the best thing for TiVo investors would be concrete details about its cable partners, not more announcements about new features.

Kelman, Harding and Moran all have a "Hold" rating on TiVo but they each said that TiVo's technological edge over competitors is worth noting and that if the company is able to sign up more cable companies soon, that would be a huge boost for the stock.

"The quicker that TiVo can sign up new cable companies and the faster they can transition into more of a licensing business model, the better," said Harding.

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Analysts quoted in this story do not own shares of TiVo. Maxim Group expects to receive compensation for investment banking services from TiVo within the next few months.