Why I'm Buying 600 Shares of this Well-Known Stock

If you're like me, then you've grown dependent on a digital video recorder (DVR) for your evening's entertainment. The ability to store hours of my favorite shows -- and access them instantly -- was only hinted at when video-tape recorders (VCRs) were first introduced in the 1980s.
But as it often happens in the land of high-tech, the company that comes up with a great idea isn't always the one to ultimately get rich from it. These days, you can find DVRs made by Cisco Systems (Nasdaq: CSCO), Google's (Nasdaq: GOOG) Motorola division and others. The company that pioneered the DVR, TiVo (Nasdaq: TIVO), has become something of an afterthought for investors.

You can understand why. TiVo's technology has been so widely copied, that key customers such as DirecTV (NYSE: DTV) began to flee. Sales peaked at about $270 million in fiscal (January) 2008 and have never reached that level again. Equally damming, TiVo has lost money in six of the past eight years. More recently, the company has seen cash fly out the door, as it pays an army of lawyers to pursue several important legal cases.
Yet, all of that may soon be in the past. TiVo is turning the corner on several fronts, and with a few small breaks, this fallen tech star could see its share price move up sharply in coming quarters. I want to own this stock before these catalysts hit the tape, which is why I'm adding this fallen tech star to my $100,000 Real-Money Portolio.
TiVo has a fairly complicated recent history, which I explained in detail last December. Please be sure and read that as a backgrounder as I'll be updating the company's progress from there. Incidentally, I predicted shares might rise 50% at the time, and they eventually gained 25% during the following two months before giving back those gains. I still see 50% upside -- or more -- as I'll explain in a moment.

In recent years, TiVo has suffered from subscriber declines. But since 2012 began, that trend has reversed. The company has also made progress on the legal front. Here's what has transpired thus far in 2012:

• On Jan. 4, the company announced a legal settlement with AT&T (NYSE: T) that alleged patent infringement. TiVo will receive a series of payments through 2018, totaling at least $215 million.

On the subscriber front, the outlook is quite bright. Much of the recent subscriber growth has been driven by the U.K.'s Virgin Media and Spain's ONO. Here in the United States, Charter Communications (Nasdaq: CHTR) has been expected to be a major customer, though a recent management change has led Charter to delay those plans for a few quarters. Comcast (Nasdaq: CMCSA) is also now adding to TiVo's subscriber base, although at a fairly modest pace.

Assuming TiVo is able to boost its subscriber base to four million by 2014, that business would likely be worth roughly $600 million (or $150 per subscriber), by my math (using the net present value of long-term subscription revenues). Taken together, these all value TiVo at around $1.7 billion, or about 40% above the current market value.
Risks to Consider: If TiVo loses these lawsuits, then you are simply looking at the core business and the cash balance, which as noted, are likely worth a collective $1 billion, or around $8 a share. That's a likely floor for this stock.