Wednesday, November 01, 2006

Calls of Note Part 1

- JP Morgan is initiating DivX (NASDAQ:DIVX) with an Overweight rating.

According to the firm this profitable early-stage company offers very strong growth and profit prospects, as the leading independent supplier of video compression technology to the consumer electronics industry and to over 250M internet users, as they move to Web 2.0 and rich-media viewing.

Even operating lights out, momentum in CE licensing should fuel the company's growth through 2008 owing to the first-time adoption of the DIVX Codec on DVD players. As penetration goes from about 25% today, globally, to 40%, the firm believes DIVX CE licensing will grow over 50% in 2007 and over 30% in 2008.

DIVX's web strategy could yield upside, owing to aggressive monetization of DIVX's user touch-points (250 million player downloads, 90 million activations per month), and Stage6 sets a high standard for quality video playback that could position DIVX as a distributor of premium content and expand the Google relationship.

DIVX business model yields over 93% gross margins and tremendous operating leverage as the business grows. They expect 29% EPS CAGR through 2010 on at least 26% revenue growth, with much higher growth rates in the next two years.

JP believes DIVX should trade at a premium to its nearest peers, Dolby and DTSI (mean multiple of 26.3x FY07E PF EPS), and to the mean of firm's coverage universe (22.2x FY07E EPS), owing to superior margin structure and growth prospects, and potential upside from strategic initiatives. DIVX trades at 24.8 times PF 08E EPS of $0.92 and a PEG of 0.86, which they consider an attractive price level.

Notablecalls: This is the first high profile init. DIVX has had. JP Morgan is wildly positive and it's bound to get attention. Expect to see some more positive inits. in the coming days with the stock reacting well.

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