DivX New Strategy More Than Strange (DIVX)

DivX Inc. (NASDAQ:DIVX) is a company where it goes without saying that it has been in trouble for shareholders.  This went from a smoking hot post-IPO performer after Jim Cramer endorsed it, then it ran up too much, then the selling started, and then it went from a perceived boom to a perceived bust.

This Tuesday the company made a strange ‘maximizing value’ announcement for one that has only been public for about 10 months.  The company said that co-founder and chairman Jordan Greenhall would step down from his role as CEO to lead the process of a spin-out of Stage6.  Kevin Hell, the Company’s President, has been named Acting Chief Executive Officer.  Did Kevin say "Hell Yes!" on this?  It seems like this move for two growth engines might only create two smaller fish in a growing pond, and perhaps a pond with an undertow.

We would have covered this earlier, but in the midst of two major sell-offs a company-specific story like this is hardly worth the effort.  In June, almost 10 million unique visitors visited the Stage6 website, compared to 4 million in April. As a result, Stage6 recently became one of the Top 200 most-visited websites, according to Alexa.com.  If you visit Alexa that super high site ranking for Stage6 is different, although a comparison on the actual DivX.com website review on Alexa does show a much higher ranking consistent with the company’s loose description of the split.

Unfortunately, it also says that Stage6 will require ‘substantial additional financial investment to continue its dramatic traffic growth and realize its full potential.’ This will supposedly allow DivX to narrow its focus and drive its core strategy forward.  We will get a separate financial report from the two companies with earnings on August 9. 

The company couldn’t have picked a more unlucky week to make the announcement with the market slide.  That certainly isn’t the company’s fault, but that doesn’t mean it isn’t its problem.  Shares briefly hit a new all-time low at $12.20 this morning when the market gapped down after the open.  Its trading range since its IPO is now $12.20 to $31.89 and if the company hits the consensus estimates for the year it trades close to 25-times fiscal 2007 earnings and a tad more than 5-times revenue.  It is also worth about 3-times tangible book value, but that is based on the prior quarter and may be different after the new earnings.  The stock might not be expensive on the surface, but such difficult issues out of a recent IPO that is deemed "hot" by traders usually sinks interest in a stock for some time.

Maybe the worst is behind it with shares so low.  We won’t know until it releases results, and shares have already bounced this morning.  Either way, this is much more than unusual for such a young company and with the tightening credit demands of late you have to at least keep it in your mind that ‘funding’ could come at a significantly higher price than just a few weeks ago.

Jon C. Ogg
July 27, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.