Double feature to end the year:

Questions

Instead of a list of my own personal resolutions, this year I am offering a list of questions for my wonderful readers. You should be able to answer all of these on January 1st, 2005. If you can, you are probably in line for a good year financially.

1. What is your net worth? (scroll to Tuesday)
2. How much is your home worth?
3. What is your total credit limit?
4. How much credit are you currently using?
5. How much does your credit cost you per month?
6. How much do you expect to earn, after tax, this year?
7. What are your total predicted expenses for the year? Include taxes, holiday gifts, insurance payments, and other non-monthly expenses
8. How much do you expect to save (via 401K, IRA, etc) this year?
9. Does answer 8 jive with questions 6 and 7?
10. What is your predicted Net Worth for Dec 31, 2005?

Advanced Bonus Questions:

1. What was your Net Worth as of January 1, 2004?
2. What was your predicted net worth for Dec 31, 2004?
3. Was it accurate? Why or why not?

Most people can not answer all of these questions. If you can answer most of them, you are in good shape. Answer all of them and you are the master of your financial domain, no matter how much you earn or spend. Happy New Year!

Tivo by the numbers

When I recommended Tivo stock last week, I pretty much just gave my opinion without much backing by numbers. I realize that my opinion may be less than convincing for some people, so today I’ll try to use some actual numbers in my analysis.

First, there is already a substantial short interest in TIVO - as of last month it was over 31%, nearly the highest it has ever been. To me, this indicates that there are a lot more potential buyers than sellers - all the people who want to sell the stock have sold short, while potential buyers include all the short sellers who will have to cover their positions at some point. In particular if TIVO goes on a run of 20% or so, some short positions would presumably be forced to cover, bolstering the rally.

Last week I mentioned the growth curve of subscribers being somewhat behind that of the iPod. Here are some actual figures: In March 2003, a little more than 18 months ago, TIVO added 115,000 subscribers to achieve a base of 624,000. As of January 2004, the total was over 1 million. 11 months later, the subscriber base hit 2.3 million.

So looking at the trend, we essentially have the service doubling the number of subscribers in a little less than a year (this is true before March 2003 as well). That may not match the incredible explosion of growth of the iPod (from 750,000 to over 4 million in 1 year, or about 5 times the number of units sold), but it is not bad at all, especially when considering that there is no competition growing any faster or larger. The growth is expected to continue, with the Motley Fool mentioning that the percentage of households with Tivo is expected to grow from 5% to 43% in 5 years. While a pure doubling of subscribers would achieve this growth in about 3 years, exponential growth can not continue indefinitely. Of course if 1-in-5 or 2-in-5 households have Tivo in a few years, the current stock price of about $6 per share will be a total joke.

Yet some wonder if TIVO will even survive. They point out that the new subscribers are not adding significantly to the bottom line. Also, most subscribers seem to be coming through DirecTV, which may curtail their involvement with TIVO in favor of another DVR service. These complaints are, I think, short-sighted. TIVO needs market penetration, not big profits per customer. The service they provide, downloading listings for a monthly fee, should be almost cost-free for the company on a per-subscriber basis. In other words, even $1 per DirecTV customer per month is about 90% profit. $10 per stand-alone customer is 99% profit. Clearly, wherever the subscribers come from, the priority is to get more of them rather than to try to improve profits per customer (of course they are trying to get more stand-alone customers, as they are much more profitable).

Additionally, the concern over DirecTV is overblown. If DirecTV releases a new Tivo-less box, they face a lot of issues. First, another provider such as DISH would likely make a grab at TIVO, damaging DirecTV. Also, their base of customers that already have TIVO would be very unlikely to chuck their old equipment just to buy a new box that does the same thing less well (though cost could be competitive). DirecTV will have TIVO customers for years to come, and can not simply cut their ties. TIVO continues to be the DVR of choice and I believe that even if DirecTV offers multiple options, TIVO will still dominate their integrated DVR sales.

Another reason I think TIVO stock will do well is that they currently do not have earnings. That may sound funny, but my point is that they do not yet have earnings - and that precludes many investors from buying. Once they show a profit, we can expect more people to become convinced they are legitimate. More buyers is a good thing. When will they have earnings? Right now they have about 155M in revenues, or $2 per share, or $67 per customer (some pay a lot more than others, of course). Their earnings are -75 cents per share. Based on those numbers, if they double their subscriber base again in the next year, they should become profitable. It certainly is not a guarantee, nor even a prediction - I honestly don’t know all that much about how companies figure their earnings and such. But it seems reasonable to expect TIVO to become profitable by this time next year.

One problem I see with TIVO is that they don't have much cash. They don't have any debt, which is good, but their cash situation is not very good. They have a little over $1 per share in cash, and they are currently losing about 75 cents per share per year. So, to avoid taking debt or diluting shares, they will need to become profitable soon. So this is one valid area of concern should their subscriber base growth slow down significantly.

Looking at who holds TIVO, we see that TIVO is approximately 50% owned by insiders, and that the remaining 50% is about 50% owned by institutions. That indicates to me that there are not especially many shares available for sale, provided the institutions hold. In particular, if more institutional investors accumulate shares, then we can expect some significant if short-term price spikes. There certainly aren't any negative aspects of the current holdings - the insiders are heavily invested and the institutions are buying in, both good signs.

I hope this expansion of my analysis helps in your consideration of TIVO stock. My recommendation is to take your first $300 or $400 and get a TIVO with a lifetime subscription, then take your next $1600 or $3000 or whatever you are comfortable with, and buy some TIVO stock. I haven't written here about the quality of the TIVO product (again), but the best comparison is that of Apple products versus the drab PC industry - TIVO's products and service are top-notch, and their competitors hardly deserve the description. The stock is up about 5% as of this writing, and while it may be rocky, I fully expect to see TIVO at $15 or higher this time next year. Enjoy and happy new year.

Adoring readers, I apologize for the unannounced absence. I have simply been keeping busy with other, less worthy interests. However, I’ll take a break for a moment here to give you my Christmas gift: a stock pick.

Before I do, I’d like to mention that WPTE, previously recommended here at around $11 per share, has been bouncing around and is currently about $15 per share. I expect more growth but it is certainly a stock that requires some attention. I do not feel it is a good long term investment. However, the recent news is very good, with reports that most WPTE branded merchandise is flying off the shelves in Sam’s Club, on Amazon.com, and through other retail outlets. $30 per share is not an unreasonable target for this short-term play.

But you already knew about that. Here we go:

The Next iPod: Tivo

The iPod is now ascendant: around 5 million units will be sold for the Christmas quarter, up from some 750,000 units last year. That is some explosive growth, and Apple stock is reflecting that success, up big this year. The iPod has been out for approximately 3 years – sales started out slowly, and have been increasing exponentially.

With somewhere around 7.5 million units sold, there is still room for more growth both domestically and world-wide. The iPod wasn’t the first mp3 player, but it was the best-designed and easiest to use. There were certainly critics and doubters early on, but the transformative nature of the device has carried the day. The iPod has achieved a major cultural relevance, although there are still many people who are only vaguely aware of what an iPod is. There are still many, many pockets and belts awaiting an iPod, and sales will continue to be huge for years to come. There is no iPod-killer, and even if a better device were to be released, it would not eclipse the juggernaut.

I feel that Tivo is a very similar product to the iPod. It is transformative to the way TV is watched, and just like an iPod user will never again carry a CD-player, a Tivo user will never again enjoy TV without his Tivo. It quickly becomes a necessity. Tivo is not the only television recorder, but like the iPod it has the best user interface (the Tivo remote, with its excellent design, is akin to the iPod click wheel; the on-screen navigation is also intuitive). More importantly, it has achieved a cultural significance, appearing on television shows like Sex and the City and receiving many glowing accounts in major newspapers and magazines. Tivo has quite a lead on the competition.

Similar to the iPod, the competitors to Tivo don’t really understand the market. The iPod has undergone several generational improvements, yet all devices are called iPod and operate in a similar manner. Competitors assign kooky alpha-numeric model numbers to their devices, or give them creative names like “Nomad” and “Jukebox” but then proceed to give a different name to every variation. Steve Jobs must be laughing at his competition, as they repeatedly market their products in a very stupid manner.

And such is Tivo. Tivo has always endeavored to work with as many services as possible. The relationship with DirecTV has always been good, and it can handle all of the cable networks. The competition, for the most part, is fractured. ReplayTV, an early competitor, has been defeated. The xx78sd999MPOPO-type models offered by cable companies are usually rentals and therefore engender no customer loyalty – change to DirecTV or another cable company and the DVR box goes with it. They also have craptacular interfaces and are nowhere near as reliable as the Tivo.

I should mention that in my personal experience with Tivo, I have never had a problem. And we use our Tivo every day, for more than 2 years now. The box has never shut down and required a reboot, and the scheduling service has never failed. All programs I request are duly recorded, and when I play them, there is never any problem. That is simply great! As devoted a fan of the iPod as I am, my Tivo unit is actually a better performer. In fact, if I had to pick between my iPod and my Tivo, the Tivo would win hands down. If my Tivo broke tomorrow I would buy another one before dinner.

Back to the numbers: Tivo unit/subscriber growth has been improving rapidly. In the last year they more than doubled to about 800,000 subscribers, similar to the iPods numbers about 15 or 18 months ago.

There are some criticisms that they don’t make enough profit per user, that they face competition from no-name DVR units, and that they will lose something if DirecTV stops using their service. Perhaps as a result, their stock is pretty beaten down – currently around $5.50 per share, representing a market capitalization of around $550 million. Tivo is still not profitable, having negative earnings per share and no P/E ratio. The criticisms are not untrue, but I believe they miss the overall power of the device and the momentum of its popularity.

Now after two years of iPod sales, I would not be shocked if the iPod division within Apple was not a money-maker – we don’t know since the iPod numbers were folded into the entire corporate results. But I do know that the iPod is now a major contributor to Apple’s bottom line – as I understand it, approaching 20% of corporate earnings.

Tivo does not have the big corporate backing of Apple – they essentially have just one product, the Tivo. It comes in various flavors (HD, 40-, 60-, and 80-hour units), but they are all Tivo. And when the product takes off, unlike the iPod, the profits will be essentially 100% of the company earnings. Now imagine if, 18 months ago, you could have invested in just the iPod portion of Apple – what kind of winning investment would that be? Huge. Simply huge.

Well folks, here’s your chance. Tivo this year looks an awful lot like the iPod did last year. Last year was the first year that many retailers started offering the iPod – I remember Bloomingdale’s men’s department carrying it, and CompUSA, and then Circuit City and Best Buy. For Tivo, this is the first year they are in Target and other mass-distribution stores. Culturally, we have Tivo being given away by television shows and radio shows and as a Chritstmas gift from those in the know to those who will. By next Christmas Tivo may look a lot like the iPod does this year – with a huge cultural niche and a ravenous market. And a stock price two or three times higher than today.

Now I should mention that Tivo the company does not make money on the sale of each Tivo unit in the same way Apple does with the iPod. This is a significant difference. Tivo licenses their interface, and other manufacturers produce the units. Tivo makes most of their money using a monthly subscription, which can be greatly reduced if the service is sold through DirecTV. Of course, they also have much lower costs, and about 90% of income per subscriber is profit. There is a lot of upside and very low risk – their main task is to get more units into more homes.

So this is my gift to you, advice: go buy some Tivo stock. I have 300 shares, and I am thinking of adding some more. You should too. Not your entire portfolio, but whatever you are comfortable with. If it hasn’t doubled by this time next year, don’t give me a Christmas present. It it’s over $20 per share, go buy yourself an iPod as reward. At the current price this stock is as much of a lock to double as I can imagine – a great deal for a great product by a good little company called Tivo, Inc.

Before I go, I will relate to you my corporate Christmas wish: “Tivo. By Apple.” Now that would be a guaranteed winner.