Friday, January 05, 2007

Calls of Note Part 2

JP Morgan is adding DivX (NASDAQ:DIVX) to the JPMorgan Focus List with a January 2008 price target of $30, based on a multiple of 32 times FY08E PF EPS of $0.92, aligned with the peak multiple of near-peers DTSI and DLB.

With DIVX down 26% from a high of $31.36 on 11/28 (vs. up 2% for the SPX), they believe the risk-reward trade-off is heavily weighted toward owning DIVX , especially in advance of next week's CES and potential product and partnership announcements that might catalyze interest. Channel checks reveal that DIVX' penetration of the US DVD market stood at about 50% approaching the holidays, significantly higher than the company's own 19% assessment. JPM believes this could yield potential CE licensing upside in the seasonally strong March quarter.

The risks associated with a secondary issue of shares on the lock-up expiry on 3/20/07 is overstated, in their view: a) they think a dilutive primary issue is unlikely, b) JPM thinks institutional interest will be high, and c) at end of March investor attention will turn to the likelihood of seasonally strong CE licensing results, trumping other concerns.

Reits Overweight.

Notablecalls: Expect to see buy interest in DIVX following the calls. Good for a trade as DIVX is a mover. And when you get a chance, do check the archives for further color.

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