TiVo Deal Gets Lukewarm Reception - TheStreet

Updated from 2:49 p.m. EST

Investors cheered

TiVo

(TIVO) - Get Report

Tuesday after the company announced a deal with cable giant

Comcast

(CMSCA)

, but many analysts remain skeptical.

As part of their seven-year agreement, Comcast will market TiVo's recording service to its 21.5 million cable customers. TiVo will introduce a new version of its service that will work with the digital video recorders, or DVRs, that Comcast is currently offering customers. The companies expect a widespread implementation of the service in mid-to-late 2006.

This is TiVo's second deal with a major distribution partner and comes as its other partner,

DirecTV

(DTV)

, has begun to introduce a competing service to TiVo's. It also comes as analysts and investors have grown

increasingly dubious about TiVo's prospects.

On the news of the deal, TiVo's stock jumped as much as $2.30, or 60%, to $6.13. In recent trading, the company's shares surged $2.67, or 70%, to $6.50 a share.

But some analysts rushed in to pour some cold water on the market's enthusiasm. After the initial run-up, Janco Partners analyst April Horace downgraded TiVo's stock to sell from market perform.

Horace questioned how and to what extent Comcast will promote its TiVo offering when it becomes available, given that Comcast has in the past put more emphasis on promoting other video services. Meanwhile, the deal with Comcast may help end TiVo's already rocky relationship with DirecTV, Horace said. And it may undermine sales of TiVo's more profitable stand-alone service, she said.

"While the announcement between TiVo and Comcast sounds good, we are not assold on the deal," said Horace in her note. "In light of the risks associated with the unknowns with Comcast ... we feel the shares have more downside risks than any

further upside." Horace does not have a position in TiVo shares and Janco has not received fees for investment banking from TiVo in the last year.

Similarly, SunTrust Robinson Humphrey analyst Christopher Rowen argued that the deal with Comcast is likely to give more of a psychological boost for TiVo than a financial one. To date, Comcast has marketed DVRs solely to its digital cable subscribers, Rowen said. But only 8 million, or 37%, of Comcast's customers subscribe to digital cable, he said.

After three years of TiVo's agreement with DirecTV, just 20% of DirecTV's subscribers access TiVo, Rowen noted. Assuming a similar penetration rate at Comcast would mean an additional 1.6 million subscribers for TiVo and some $19 million in incremental revenue, he estimated. That would mean about 8 cents to 9 cents in incremental per-share earnings -- but likely not until 2008, he said.

"We think the financial impact will be limited. Therefore, we would not recommend chasing TiVo shares on this news," Rowen said. TiVo has been a noninvestment banking client of SunTrust in the last year.

TiVo offers DVR software and a digital television programming guide. The company's service has won the praise of many of its customers for its ease of use and its features.

But the company has struggled to attract customers, particularly as cable and satellite television providers have offered competing services. Where TiVo branded boxes can cost hundreds of dollars up front, cable and satellite providers typically rent their DVRs to customers for low monthly fees.

TiVo worked to build its customer base last year, and saw its subscriber numbers grow to 3 million, including a 30% jump in the fourth quarter. But much of the company's subscriber growth has been coming from DirecTV. With DirecTV expected to introduce a rival DVR later this year, many analyst have questioned the future of their relationship.

In the meantime, TiVo's losses swelled as it offered rebates and discounts to attract new customers. The company promised to staunch those losses this year and move back to profitability. However, many analysts doubted the company could achieve that goal and continue to grow its revenue as well as add customers at a rapid clip.

Inherent in the Comcast deal is the possibility that the company can achieve both goals. Based on TiVo's "improved prospects," Citigroup Smith Barney analyst Tony Wible upgraded the company's stock to a hold from a sell and raised his price target to $5 a share from $3.85.

"We expect the deal with CMCSA will be accretive," said Wible, whose company has provided noninvestment banking services for TiVo in the last year."The ... deal offsets some of our concerns that DTV would start aggressively marketing its upcoming

DVR service to its subscriber base," he said.

But even Wible noted that the companies gave few details on the economics of the deal. In a regulatory filing, TiVo said that it granted Comcast "most favored customer" status, meaning that it has to offer Comcast as good a deal as it offers to any of its other partners. That could limit the upside that TiVo will see from the deal, analysts noted.