Stock rebound on TiVo wish list

YouTube pickup adds fuel to Google, Netflix big in October

Enjoying its best month in three years, the Nasdaq rose 4.8% in October, though it was a mixed bag for the stocks of new-media companies.

Among those leading to the downside were shares of TiVo Inc., down 15.8% for the month, and XM Satellite Radio, down 9.6%.

TiVo stock has been sliding for seven weeks, since one judge stayed another's injunction order against EchoStar Communications Corp.'s Dish satellite TV network, ordering it to disable more than 3 million DVRs that a court has said infringe TiVo's patents.

The stay could delay for 18 months or more any benefit to TiVo for its hard-fought court victory this year over EchoStar.

"TiVo argued to the federal court that if the injunction didn't go into effect immediately, it would not survive as a company. And it didn't get the immediate injunction," said Harold McElhinny, EchoStar's lead trial counsel.

As for XM — and Sirius Satellite Radio as well — their stocks might be suffering in part because of renegotiations over royalties that the companies must pay to the music industry. Their current agreements expire this year.

They pay 7% of their revenue now, which Banc of America analyst Jonathan Jacoby estimates would amount to a combined $384 million that the companies would owe in music royalties for 2010. But if the rate goes to 9%, they would owe an additional $110 million.

Many observers argue that it is not the additional money that is spooking investors but the uncertainty about expiring agreements and not knowing what the new arrangements will bring.

Jacoby recommends shares of XM, which he says trade at about a 30% discount to Sirius shares when adjusted for such things as current and future subscriber counts and projections of profitability.

But Citigroup analyst Eileen Furukawa is bullish on both stocks, arguing that so much bad news has been factored into each that they are due for a rally, especially into the holiday gift-giving season.

"We are currently forecasting the satellite (radio) industry to grow from 9 million subscribers at year-end 2005 to 51 million subscribers by year-end 2015," Furukawa said.

Sirius shares fell 2.3% last month.

Leading new-media shares higher during the frame was Netflix Inc., whose stock leapt 21.4% on a strong quarterly earnings report that bested the projections of analysts on several fronts, including the addition of 493,000 subscribers to total 5.7 million.

Google Inc. also was an overachiever, with its stock rising 18.5% during the frame, partially because of a well-received quarterly earnings report but also because Wall Street liked its decision to pay $1.65 billion to acquire viral video site YouTube.

Jefferies & Co. analyst Youssef Squali said video is "highly valued by advertisers, given its ability to more effectively convey a marketing message. Google expects YouTube to become a coveted channel for its clients, bringing it closer to Yahoo! in competition for display ad dollars, which account for roughly half of all ad dollars online."

According to comScore Video Metrix, Yahoo! streamed 812 million video clips in July compared with Google's 60 million, while YouTube streamed 649 million.

Perhaps hurt by Google's sudden thrust into Internet video, Yahoo! shares have been underperforming of late. A disappointing quarterly earnings report didn't help matters, either. But Yahoo! stock rebounded late in the month to close 4.2% higher.

BMO Capital Markets analyst Leland Westerfield reiterated his $37 price target on shares, reflecting his thesis that the stock will rise about 41% over the next year or so. He is particularly bullish on the company's Panama product.

Meanwhile, video game giant Electronic Arts, which caught a downgrade late last month from Kaufman Bros., was another laggard in October but showed signs of life as it was the top gainer Friday on The Hollywood Reporter's Showbiz 50.
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