“And TiVo recording big gains this afternoon after a court of appeals upheld the judgment against Echostar in favor of TiVo in a patent infringement case and this stock is ending at session highs of 62%.”– Fox Business Countdown to The Closing Bell 3/4/2010

TiVo, Inc (TIVO) shareholders were rewarded today thanks to a favorable 2-1 ruling in the US Court of Appeals against sister companies Dish Network (DISH) and Echostar (SATS).  The patent in question relates to storing and retrieving content on digital video recorders, and today’s ruling solidifies TiVo claims of infringement although further appeals are expected.  Assuming this ruling withstands yet more bickering, it could represent a windfall of more than $300 million to TiVo for damages and sanctions.  Not included in that lofty sum is the $104.6 million that Dish Network has already paid to TiVo from a ruling in a 2004 suit.  The judgement today was related to Dish’s redesign of its DVR in order to comply with the earlier infringement, which the court has ruled still infringes.

TiVo could stand to benefit from additional patent infringement battles currently waging with both AT&T (T) and Verizon (VZ).  Microsoft (MSFT), whose software is used in AT&T UVerse set-top boxes, has sued TiVo alleging patent violations.  Clearly, there may be more legal fireworks in store for TiVo, as DVR services has become hugely popular.  Other television service providers have already decided to license TiVo’s technology, but others like Dish are still trying to work around the patents.

At Ockham, we are not patent attorneys, so we cannot speak knowledgeably about the prospects for the ongoing litigation.  What we do know is that TiVo’s stock has advanced 62% in one day on volume that was nearly 40x greater than their average day.  This is the second huge gain TiVo has had related to legal externalities in under a year.  From our view, TiVo’s value is correlated far more to their patent disputes rather than fundamentals, as operationally TiVo is expected to lose money both this year and the next.

With the stock hitting its highest point since 2000, we would advise TIVO investors to take some profits at this point even though it was rated Fairly Valued at the beginning of the week.  The possible outcomes and licensing deals that result from patent disputes are very difficult to forecast.  What we do know is that TiVo over the last ten years has traded for price-to-sales ratio of 2.42x to 4.56x, but following today’s run the stock is trading way above that range at 9.61x.  We normally do a similar analysis of price-to-cash earnings, but TiVo lacks enough positive cash earnings history to make it a meaningful analysis.

Shareholders should be pleased with the performance of TiVo of late, but we would not recommend depending on further legal victories to propel the stock further.  They just unveiled their newest set-top box TiVo Premier which has generated a fair amount of excitement.  Even if these patents are upheld and lead to more lucrative licensing deals and the Premier box is a big success, the fundamentals would need to improve substantially to justify the price.

“Of course, one of the big news items of the day is going to be TiVo, TiVo winning a major lawsuit, $103 million the judge ruled in their favor against Echostar and the Dish Network. A five year legal battle and it will continue, however, it made 38% out of the gate, a significant win for TiVo.” Fox Business Network 6/3/2009

A Texas court ruled in favor of TiVo (TIVO) in a long standing patent dispute with Echostar (SATS) owners of Dish Network.  The case has been in court for the better part of five years and on Tuesday afternoon the court ruled against a work around claim made by Dish Network in order to avoid patent infringement.  Among the biggest stories here is that Echostar will be required to pay TiVo in excess of $103 million, which is in addition to the $105 million that Echostar had already paid in August of 2008.  In order for Echostar to continue using this technology, they have no other choice now then to sign a licensing agreement baring a reportedly unlikely appellate success.  Not surprisingly, TiVo shares are trading much higher this morning, as much as 45% in premarket trading.

The ruling is clearly a win for TiVo, and even though the stock price does not reflect it as of yet, it is an equally big loss for Echostar.  They spent millions in research and development costs in an attempt to work around the features that were disputed in the TiVo case.  The company has asked the court to delay enforcement because they fear losing customers if DVR service is no longer available for a period of time.

Based on our methodology, TiVo’s big gain today has made the stock appear very close to Overvalued.  As of our report on TiVo written at the beginning of the week, we had its valuation as Fairly Valued; however, we had a rationally expected price range of $7.15 to $10.05.  Of course, these are based on estimates prior to the court ruling, but it is unlikely that this will substantially change those figures.  After all, TiVo has only made a substantial profit greater than 4 cents per share in one quarter in its history as a public company.  No one knows how much a licensing deal with Echostar could add to the bottom line, but if you were lucky and patient enough to have reaped the benefit of this patent dispute, it might be an opportune time to take some gains off of the table.