Sector: Technology
Industry: Multimedia & Graphics Software
Key Statistics
 

Shares of DivX, Inc. (DIVX) dropped nearly 9% after the maker of digital video compression software maker said its fourth quarter profit climbed three-fold on strong top line growth, but offered an outlook that disappointed investors.

Although the stock is up sharply since its public debut in late September, amid voracious demand for user-generated and professional online videos, it is off nearly 30% since its high in November at $31.89.  Furthermore, it is off about 10% since late December, when we highlighted our bearish opinion, given the company's high product and customer concentration, growing competitive pressures, and lofty valuation.  Our initial view remains unchanged.

In the fourth quarter, DivX posted a profit of $7.4 million, or $0.21 per share, up from $2.2 million, or $0.03 per share, in the same period last year.  Revenue climbed 58% year/year, and about 8.4% sequentially, to $16.7 million, driven by a 44.6% increase in technology licensing.  The company's per share profit beat analysts' expectations by six cents, due primarily to a significant income tax benefit, and revenue was just above the consensus estimate of $16.6 million. 

Looking to the fiscal first quarter, DivX forecast revenue in a range of $17.3 to $19.3 million, representing sequential growth of 3.6% to 15.6%.  That compares with the consensus estimate of $18.9 million in revenue. 

Despite its solid growth, DivX carries some substantial risks.  The company faces growing competition from Adobe Systems (SDBE), Apple Computer (AAPL), Google (GOOG), Microsoft (MSFT) and RealNetworks (RNWK), which offer competing video formats, as well as News Corp. (NWS), which is making a strong push in the digital media space and has far greater resources at its disposal. 

Although the company is building its own user-generated video site, Stage6, it appears to be outclassed when it comes to building a leading video sharing community.  The market is already crowded, with heavyweights like YouTube, MySpace, Microsoft, and Yahoo (YHOO) all looking to profit from growing online video consumption. 

While DivX still stands to benefit from increasing demand for digital media, we remain skeptical about the stock considering the various risks that we mentioned previously, as well as risk associated with a potential secondary offering when the company's IPO lock-up expires on March 20, which would dilute the ownership position of shareholders who own shares that were issued in the IPO. 

(Disclosure: Briefing.com has a business relationship with Google and Yahoo!)

--Richard Jahnke, Briefing.com