NEW YORK (TheStreet) -- TiVo(TIVO) - Get Report shares are trading more than 6% higher Wednesday after the digital recording television services company reported a 30% increase in subscribers year-over-year for the period that ended Jan. 31. In further good news, net subscriber additions for the quarter reached 340,000, topping the 2013 4Q mark of 319,000. But does that mean the worst is over for TiVo? It does not.
Investors are jumping for joy prematurely.
Although the San Jose, Calif.-based company did exceed analysts' profit estimates, posting net income of $7.1 million, TiVo's revenue of $114.1 million still missed projections of $117.3 million by almost 3%. This means that although the company is gaining subscribers at a decent rate, it's still not moving ahead fast enough to meet long-term growth expectations, based on the company's business outlook.
First-quarter profit projection of $5 million to $8 million -- while in line with estimates -- is not enough. TiVo must figure out ways to rely more on its own subscribers, and less on the ones it gets from cable companies like Time Warner Cable (TWX) .
During the quarter, subscriber additions from cable operators outpaced TiVo-owned subscriber adds by more than 20 times -- (324,000 vs. 16,000). And it's those TiVo-owned subscribers that most benefit the company, due to the higher margins and higher revenue per subscriber they generate.
Meanwhile, with cable companies suffering from headwinds of their own, including cord-cutting and the new net neutrality rules, TiVo is left reliant for a huge percentage of its business on partners that are facing considerable uncertainty.
TiVo has to show it can produce long-term profits, which is what investors buying the stock at today's trailing price-to-earnings ratio of 56, are betting on.
Not only is TiVo's trailing earnings multiple less than one-third of the average P/E of companies in the S&P 500, it's also only in the neighborhood of half the average P/E of companies in the PowerShares Dynamic Media Portfolio(PBS) - Get Report -- media/entertainment giants like DirecTV (DTV) and Disney(DIS) - Get Report and Time Warner Cable. Take a look at the chart.
TiVo's trailing P/E of 52 is more than twice that of all of those companies. And two of those three pay dividends. TiVo does not.
But looking ahead to the next twelve months, TiVo's stock assumes it will outperform the profit projections of not just these three companies, but the entire S&P 500. On a forward-looking basis, its stock is carries a P/E of more than 46, compared to 14, 19 and 21 for DirecTV, Time Warner Cable and Disney, respectively.
That's simply too much implied risk for investors to take, especially at a time when the company projects fiscal first-quarter service/tech revenue to be in the range of $90 million to $92 million, below estimates of $92.3 million. The best play for Tivo shareholders now is to sell into this rally and move on to other, less risky stocks.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.