TiVo

(TIVO) - Get Report

, which makes digital video recording devices (DVRs) sold in retail stores and offered to

DirecTV

(DTV)

subscribers, has become the target of a lot of investor attention again after two very noneventful months.

Not only is there speculation that TiVo is close to receiving a favorable ruling in its patent infringement case against

EchoStar

(DISH) - Get Report

, which has its own DVR technology that allows users to fast forward and rewind television shows in progress, but TiVo now plans to use pop-up advertisements in its service to generate ad revenues. This is a misstep -- we believe -- because many users sign up for TiVo for the sole purpose of watching recorded television shows free of commercials.

We want to revisit TiVo as a trade in light of the recent news and give our perspective on how to play the gyrating stock. In recent weeks, TiVo's shares have bounced as high as $6 a share and as low as $4.50 a share.

We have written negatively on TiVo's long-term business model in the past for our newsletter, Stocks Under $10, based on our belief that the company is losing its competitive edge in the DVR space and could soon be forced to cut prices to entice customers to buy stand-alone DVR hardware. We also haven't bought into the theory that a big cable company is close to signing a deal with TiVo to use its DVR technology.

The crux of the TiVo bear case lies in its licensing agreement with satellite TV company DirecTV. In the most recent quarter, DirecTV accounted for 316,000, or 75%, of TiVo's 419,000 subscriber additions. In other words, TiVo generated a paltry 103,000 additions on a stand-alone basis. While these numbers, both on a stan-alone basis and with the Tivo partnership, represent 100% year-over-year gains, there is speculation about the longevity of the partnership with the contract set to expire in 2007.

One theory is that DirecTV, which is now majority owned by

Fox Entertainment

(FOX) - Get Report

, will walk away from the deal and come up with its own DVR application. Earlier this year, DirecTV Vice Chairman Eddie Hartenstein resigned from his position on TiVo's board of directors. We believe the move signals DirecTV's intention to separate itself from TiVo. This belief is confirmed by the fact that DirecTV also sold its entire 3.5 million-share stake in TiVo around the same time.

More recently, investors got caught up in speculation that the company was near a resolution in its ongoing patent infringement case against EchoStar. TiVo is claiming that EchoStar is infringing on its technology with its DVR services embedded in its own set-top boxes. Rumors have been circulating that the judge is close to reaching a decision in TiVo's favor and a favorable ruling would certainly be a big positive for TiVo. Such a ruling could open up the flood gates to a stream of royalty payment from EchoStar and serve as precedent in future patent suits. (The near-term likelihood of a settlement or judgement is limited as there is no significant court date set for the rest of the year, but it is always a possibility.)

As is usual with TiVo, though, the steak failed to live up to the sizzle with respect to the rumors, and we sold our position for a small loss when we saw the news wasn't coming to fruition.

Additionally, TiVo announced uninspiring third-quarter earnings results on Nov. 22 and the stock sold off by 25%. The earnings announcement revealed that subscriber acquisition costs (SAC) almost doubled in the quarter, which is somewhat disheartening to those who believe the company can act as a stand-alone operation. Subscriber acquisition costs are all the marketing, advertising, discounting and man hours that go into signing up a TiVo customer. The higher the SAC, the longer the payback period is to break even.

Making matters worse, SACs are expected to nearly double next year based on Wall Street forecasts, and we see no reason to doubt this prediction given the increasing competition in the space. More cable companies are offering DVR technology as part of video-on-demand services, eliminating the need to go to

Best Buy

(BBY) - Get Report

and pick up a $100 piece of TiVo hardware and pay a monthly subscription fee.

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The bottom line is that no matter how hard TiVo tries to win over consumers and grow as a stand-alone business, it is constantly fighting off the 800-pound gorilla in the room -- cable. That is why, once again, we are recommending investors who aren't nimble enough to game the short-term direction of this stock stay on the sidelines and avoid getting sucked into the short-term hype.

P.S. Remember, stocks priced under $10 have the potential to move quickly. So, you might want to get our current recommendations now with a

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to TheStreet.com.

As originally published, this story contained an error. Please see

Corrections and Clarifications

.

William Gabrielski is a research associate at TheStreet.com and is accredited with a Series 7 license. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback and invites you to send your comments to

william.gabrielski@thestreet.com.

Interested in more writings from William Gabrielski? Check out Stocks Under $10. For more information,

click here.

David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier welcomes your feedback and invites you to send your comments to

david.peltier@thestreet.com.