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Put mob psychology to work for you
Buy the next new tech wave for a possible 500% gain in 23 months!
by Christian DeHaemer
In times of yore, a small elite group had the education, knowledge and disposable income to create a system of buying and selling shares in publicly owned companies. This clique created a system of valuation based on ratios: ev/sales, p/e, debt/equity, etc. Using these sometimes-clumsy methods you could melt down a company's assets into easily understandable numbers. You bought low p/e and high growth -- simple.
There were other forms of investing, to be sure -- technical analysis, momentum, and insider trading. However, the tried and true lifetime method has always been fundamental valuation. And a few years after this mania ends it will be again. But right now value investing in the United States will get you a fistful of frustration.
Not your fathers' market
The latest jump in the top-tier Nasdaq was caused by small investors, not institutions. I know this because Schwab online increased its November volume by 40% -- the second largest one-month jump by that company ever.
More than 50% of Americans are now invested in the equity market. That's up from 10% earlier in this century. This is important. And here's why: The new investor doesn't understand the rules of value nor does he care. He buys whatever tech he is using (AOL, YHOO, AMZN) or he is a tech guy making 70K with a lot of disposable income to throw at the next big thing.
These are people who don't know the definition of a market cap. (You find the market capitalization of a company by multiplying its share price by number of shares outstanding -- to say AOL is US$105 a share is meaningless, to say its market cap. is US$180 billion provides comparative value.)
Getting ahead of the thundering herd
The point is that today's market is driven by industry segment momentum. What we are really after is a chance to get ahead of the next mass mania. The majority of stock selections in the Taipan portfolio were chosen based on long-term future trends. Business to business e-commerce, digital wireless, broadband and the confluence of all computerized things that you can put in your pocket have been extraordinarily hot segments of late.
These companies are flying for a number of reasons, not least of which is that the potential markets for these industries are large enough to be unquantifiable. For the next three to five years we know that more people will buy digital phones. More business will go online. Bandwidth will increase to the point where it will no longer be mentioned as a concern.
We know that the mobile phone will become a digital Swiss army knife encompassing personal digital assistants, e-mail, beeper, web surfer, MP3 player, GPS receiver, personal ATM, and television.
The high tech couch potato
It seems to me that if bandwidth is no longer a problem, interactive television (ITV) will become the major form of Internet activity. Let's face it, people are as lazy as they are demanding. They want what they want, when they want it, without any hassles. It's an instant gratification world and there is nothing that fits the bill quite like ITV.
 ITV will emerge as a hybrid of Web and TV models. It is expected that ITV will be in 30 million households and generate US$10 billion in revenue by 2004. Some estimates run as high as US$15 billion in revenue.
More than 98 million U.S. households have a TV -- most have 3. More than 75% of these folks subscribe to cable. Forrester Research estimates that there will be 16 million Personal Video Recorders (PVRs) by 2004. That's a substantial market. Globally there are 900 million television households and 150 million cable households.
The ITV market will expand beyond the few players who are now involved. That said, historically, the company which is first to market tends to lead the further development of the product. Furthermore, that company is able to build its brand and marketshare, thus enabling advertising revenue as well as economies of scale.
The next big thing
Taipan has discovered a company that has won accolades for the best product of 1999. Tivo Inc. (TIVO-NASDAQ) is TV on demand. Essentially you can watch what you want when you want it. You can scan the hundreds of channels to record the shows you want directly onto a hard drive, which means that there is no reduction in the quality of video. It does this through its Personal Video Receiver (PVR). This system is designed by Tivo and built by Philips and Sony.
Now your average sofa spud can pause, record and replay live TV. Got to go to the bathroom -- no problem. Need another beer during the touchdown drive -- no problem. You can quickly see the benefits to such a device.
Couch commerce
Tivo's PVR gives content providers like television networks a whole new platform in which to deliver their product, advertising -- and let's not forget about couch commerce.
The PVR allows direct customized marketing to the individual. Much like direct mail, TV advertisers will be able to quantitatively evaluate the success of their advertising. The consumer will be able to make impulse buys in real time by entering the e-commerce site of the advertiser and place an order in between television shows.
Furthermore, Tivo can avoid sending the same commercial over and over again to the same viewer, thus eliminating advertising burnout. The viewer can elect to "fast forward"' and skip the commercial altogether. That's an exciting development for the economy as a whole.
Size is everything
This new form of media distribution will also let the networks track the viewing and buying habits of customers in a way that Nielson never could. Tivo will make sweeps week unnecessary.
Like any new product that is marginally better than the old, there is always a significant portion of the market that wants to be the first one on their block with the new technology.
Will she want it?
As of last quarter, Tivo had 2,500 subscribers. In October they added another 1,800. It is estimated that Tivo will have 25,000 subscribers by the end of 1999 and 320,000 subscribers by the end of 2000 and 1.04 million by the end of 2001. If Tivo is able to maintain its lead and achieve this sort of growth, you could see massive share price appreciation.
Revenue streams include subscription, advertising and couch commerce. Subscription at US$10 a month will be US$1.9 billion in estimated revenue by 2004. Targeted, cost-effective advertising revenue could add another US$8 billion by the same period.
Features such as Ipreview which allow sub-scribers to record shows directly from a commer-cial of that show, as well as being able to record all new episodes of the X-files for instance, greatly expand the potential of this device.
Partners include Vulcan Ventures Inc., Showtime Networks, HBO, DirectTV, NBC Multimedia, Philips, Advance/Newhouse, CBS Corp., and a slew of companies that may or may not compete directly against Tivo in the future. However, having such an impressive list of partners feeds into the hype driven market theory. Content providers will be able to offer pay for view packages and other services.
The primary competition comes from Replay Networks a private company that produces PVRs similar to Tivos. However, Taipan believes that Tivo offers a better product. Replay offers 10, 14 and 28 hour storage boxes. The three options cost US$699, US$899, and US$1499 respectively. They do not require a subscription.
Tivo offers a 14 hour box for US$499 and a lifetime subscription for US$199. (By the end of next year 100 hour boxes will be available.) Tivo is the only PVR that is available in large retail consumer electronic stores for the Christmas season. Tivo will have first branding opportunity.
Catalysts for growth.
The current share price of Tivo is US$32, with 42 million shares outstanding. With a float of only 5 million. I love small floats on hype-driven stocks.
Anyway, the current subscriber valuation for cable companies is US$4,000 per set of eyes. AOL is valued at US$8,000 per sub. (20 million current subs x 160 million recent market cap.) Based on 2001 estimated subscribers of 1.01 million -- and assuming that Tivo should sport a per subscriber valuation somewhere in the middle of these two at US$6,000 per sub...
That would give you a market cap of US$7.14 billion. Or an even six times its current market cap. Or a share price of US$192 by the end of 2001.
For a speculative play on the next mass mania buy Tivo (NASDAQ-TIVO) today under US$34! Contact info: 894 Ross Drive, Suite 100, Sunnyvale, CA 94089; Phone: (408) 747-5080, Fax: (408) 747-5096; on the Web: Investor Relations.
On behalf of Taipan, I would like to wish you and your family a merry Christmas. As you are swilling eggnog among the decadent toys you have provided for your family, give a little thought to Taipan and the six picks from this column alone that returned triple digit gains. Have a happy New Year.
In addition to his duties at Taipan, Chris DeHaemer is the editor of The Hammer.
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