DIVX Negative Enterprise Value Stock Analysis

This stock analysis is brought to you by Randy Durig of Durig Capital.

We like this one [DIVX], and it fits our model! Here is our review process, including support for why this is currently one of our top picks.

Step 1. Company with pristine balance sheet
Step 2. Extremely Low Enterprise Value
Step 3. Operation or Enterprise Driving Value to Shareholders?
Step 4. Good Business?
Step 5. Is the Train Wreck and then, the fog from the Wreck Clearing?

Company with Pristine Balance Sheets

DivX has roughly $143 million dollars in cash, or $4.38 per share, and no long term debt. DivX has a very strong balance sheet.

Extremely Low Enterprise Value

When you subtract out the cash and debt out of the enterprise, DivX’s enterprise value, or the value of the ongoing operations of the company, is actually very small.

So if you buy the company for say about $5.25 dollars per share, or about $167 million dollars, then you remove the $4.38 of cash, or $143 million dollars, the remaining value of the company is only about $24 million dollars. For a very high margin licensing company that is trying to dominate high-quality digital video across any device, with very nice established franchise, and a great ability to leverage off it’s large footprint and ecosystem, this appears to us to be extremely low.

Operation or Enterprise Driving Value to Shareholders?

DivX receives another yes. They had an outstanding quarter, as they lost 1 cent per share but their forecast for profits of 1-3 cents and higher margins and revenues next quarter. With many people worried about the dollar, DivX gains most of it’s revenues, about 3/4 of their income, from outside of North America. So if the dollar declines it should be an added windfall for a US licensing company selling it’s intellectual properties abroad. This might be why DivX has a .74 Beta, one of the lowest I could remember especially for a technology licensing company.

Good Business?

We believe this is a very good business with a chance for monopolist standard setting returns. DivX today serves approximately 200 million devices throughout it’s total ecosystem. That allows for a large market for any upgrade and/or new service, knowing the world wants a seamless way to convert your favorite flick or video onto your desired device for the day. The value to leverage a new fee-based upgrade, or add on products and services to it’s already existing 200m installed base of clients, is quite attractive. Hopefully they can create new and innovative ways to monitor this over sized footprint.

Train Wreck and fog Clearing?

When finding companies around cash value, often there is what we call a Train Wreck. With DivX, I believe the biggest negative issue is as follows:

  • Will their technology become the true standard for engaging, creation, distribution and licensing of digital video technologies?

The roadblocks often seen to DivX’s success are:

  1. highly fractured industry
  2. a new wide open paradigm emerging
  3. not a proven profitable market for companies
  4. very large companies are trying to establish simulator or competitive standards
  5. top management is over compensated
  6. UMG lawsuit

I believe all these factors and more have been priced into this company’s current price, due to their small size and single products. Being seen as Swiss, they’re not seen as a threat to most companies, and industries often in hard times will let single companies establish a standard because uniting an industry on a single standard often can greatly enhance and grow the whole industry. With DivX’s large footprint, the new paradigm and the overall poor global economy, these factors could help DivX’s chances at becoming the defacto standard, or (simply put) obtain a monopolist position with strong industry leverage.

DivX’s CEO, Kevin Hell, earlier comments were, “I believe we are in a strong position to emerge as the defacto standard for high-quality digital video across any device”. The value of DivX (which is just above cash) is priced as if it might not survive, but we believe that it’s large and increasing cash, forecast growth of profits, top line growth and focus to be the monopolist leader help DivX to be in a very strong position, being well placed to expand and profit plus possibly lead a revolution area of change.

DivX expect that it’s future success will depend upon their ability to successfully penetrate the existing markets of digital media technologies including:

Established Markets

  • DVD players
  • DVD recorders

New Markets

  • network connected DVD players
  • Blue Ray players
  • high definition DVD players
  • portable media players
  • digital still cameras
  • digital camcorders
  • mobile handsets
  • digital media software applications
  • digital TVs
  • home media centers
  • set-top boxes
  • video game consoles

To date, the DVD Markets have been the top revenue providers, but due to economic conditions the DVD sales appear to have stalled, and this has been the reason for the DivX reduction of sales for year to date in 2009.

In the 3rd Quarter, 2009, DivX announced it had 16% of sales from the New Markets category, and DivX has forecasted that 24% of revenues will come from the New Markets in the next 4th Quarter, 2009. This large uptake is helping DivX to also forecast overall higher top line revenue growth, quarter to quarter. Since royalties and licensing revenues for DivX, and most companies along similar models, are posting a quarter in arrears, a very large amount of this current quarter should already be completed with profits and sales already booked. It appears this New Market has just started to prove a nice lift to sales, and the main reason for DivX increased forecast. This also is a good time, since knowing the often much larger Christmas quarter (again in arrears) will be forecasted at the end of this quarter. Christmas could provide a much bigger boost knowing the historical large increases in volume for both the New Market category and DVD’s.

It’s my belief that the enterprise could achieve 4 times sales (giving DivX’s industry average is 4.58), which  is a valuation that could be low for a very high margin licensing firm. Four times revenues would put the enterprise value at around $8.12 a share, adding in the cash of $4.38 per share and this could have an upside of $12.50 per share and still be in parity with other technology firms. If DivX is able to gain a monopolist position and the corresponding advantages, this could put them in the 10 times revenues league.


DivX currently is in a position that we are trying to identify for our clients – a good business with operations showing many strong tangible signs of improvement, at a very low price, with the possibilities of great appreciation and/or possible buyouts, and the hopefully limited downsize. Even if DivX isn’t able to achieve monopolistic appreciation in our best case scenario, DivX’s very low enterprise value alone could be the basis for a limited value increase.


Yes, and absolutely yes, I and related accounts own this company. We started buying around 5.07 per share. I just wish I could raise the money and buy the whole company. We like to invest in profitable business enterprises that have almost zero or, like in this case, a very small enterprise value. I’m sure other successful business persons would also like to do the same.

  • Dan

    Can you elaborate on

    6 UMG lawsuit

  • Ankit Gupta

    Why will hardware manufacturers used the divx codecs in the future as opposed to any alternative? Also, it seems that for web distribution, sites like Youtube and Hulu are using the Adobe players, and so if that continues, what makes us think we will actually see DivX specifically take off?

    Also, just so I know, they make their money on having their technology used in hardware applications, and not software, right? As in, if I download a movie encoded with DivX, they don’t really make money there, right?

    I like that the stock is mostly valued for the cash, but it’s still hard to say if it’s worth it because if their technology isn’t used in the future, it could cause revenues to decline and even burn cash.

  • Although I haven’t looked into DIVX much myself, if the trend towards internet tv is true, then divx could be a powerful contender.

    I thought divx made money by selling software rather than hardware. Divx has been around for a long time, but I dont think it has much power in the real world. So many other encoders out there and most hardware these days already support all the codecs.

  • They make money having their software build into a cell phone, DVD Players and now TV’s by the manufacturer of the product.

    Adobe, Apple are dominate on the PC, and you should always add Microsoft, but DIVX plan is to have one codec fit all devices, so they are pushing hard into cell phones after a large share of DVD Players accepted them. (You might say they are taking a different path). In cellphones is where Apple is more dominate, but many competitive device manufactures are fighting Apple for total unit volumes and don’t want to support their services or apps.

    Jan Jin Thanks for the post.

    Randy Durig

  • Ankit Gupta

    Randy – can you give me examples of products that use their software? How is their software better than others?

    I agree that the stock is at a decent valuation because of all their cash, but I’m not convinced about the future. Why is their software going to be a better codec than others to work on multiple platforms? Is it a benefit to have something that works cross platform anyway? I mean, it seems like the resolution and bandwidth available wirelessly is going to remain substantially less than a wired connection for the forseeable future and so distributors will probably have to encode the video files differently anyway, so maybe it won’t be an issue for them to use multiple codecs. In addition, the resolution available on smaller portable devices is very different than on a desktop, so we don’t need the same quality as we do on a desktop.

    Randy – on a personal note, I want you to know that your analysis was very good. You should submit it to the VIC if you haven’t already. I’m just poking at it because I’m intrigued by the opportunity 🙂

  • The question is will they become, the key critical mass solution, the largest ecosystem, with over 200 million downloads there system has already some critical mass.

    It appears they are the leading truly independent player, as a phone company who would you like to use, the market open independent leader, a proprietary codec like Apple, or some new company.

    Thanks for the complement, and Jae for his posting.

    PS What is VIC?

  • ValueInvestorsClub – google it 🙂

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