During the past half decade, a revolution has taken place in our living rooms. Consumers have been discovering a range of choices at their disposal, making companies like Netflix (Nasdaq: NFLX) and Hulu household names. Yet there’s another next-generation media firm that is in the thick of the action, though you may have never heard of it. And it could turn out to be a great investment.

#-ad_banner-#This company provides interactive programming guide software to many cable and satellite TV players, controls the rights to the leading high-definition streaming technologies, manages the libraries for leading streaming music services, and is at the forefront of the transition to “cable-like” services without a traditional cable box.

You may not have heard of Rovi (Nasdaq: ROVI), simply because it changed its name in 2009 from Macrovision. Before and after that name change, Rovi has been making a series of acquisitions along the way, including:

• Gemstar, the online programming guide that had been operated by TV Guide 

• Sonic Solutions, a leading provider of downloadable software services.

Thanks to organic and acquired growth, Rovi has managed to boost sales to nearly $700 million in 2011 from $111 million in 2006. And thanks to the automated nature of the company’s technology, Rovi became a cash flow machine: free cash flow has exceeded $200 million in each of the past two years.

Many investors grew to love this stock as it delivered steady robust gains. 

You can understand why this stock gained so much ground in 2010. The company tripled operating profits to $89 million on just 13% sales growth (to $542 million, with $299 million in free cash flow also generated).

The end of go-go growth
But in hindsight, Rovi was simply moving too quickly to capture much of the growth being seen from the broadcast industry’s transition. To expect Rovi to keep growing at a very fast clip was unrealistic, and investors eventually felt burned as growth cooled. This stock would never be the same again…

The fact that these two stock charts are the same company tells you one simple fact: Rovi was probably never as good a company as its surging stock price implied, and it’s not as bad as the current chart tells you either. (In a moment, I’ll explain why I think this stock still has solid — though not spectacular upside).

What went wrong?
The stock’s steady sell-off can be explained as two distinct events. In the summer of 2011, the high-flying stock went from $60 to $45 simply because the broader market weakness was triggering an investor exodus. 

Yet even as the market began to rebound in the fall, Rovi fell sharply again as management issued tepid fourth-quarter guidance on an early November conference call. Management said that the industry’s transition was hitting a few speed bumps as cable companies deferred making choices about their next moves.

A subsequent rebound was a false dawn: The departure of a chief financial officer last month has pushed shares to three-year lows (though the CFO was subsequently replaced). Adding insult: it is now apparent that sales will grow less than 10% this year (to around $765 million) and earnings will barely budge (to around $2.50 per share). Take a snapshot, and you see a low-growth tech stock trading at around eight times projected 2012 profits. 

Yet looks are deceiving — and Rovi has more arrows in its quiver. The company has been working with a wide range of TV manufacturers, and nearly a dozen of them have signed on to incorporate Rovi’s interactive programming software on their TV sets. The promise of truly Internet-enabled TV sets has been long-delayed, but we could see them as soon as this Christmas.

Rovi should also avoid any big revenue scares as it licenses its technology and media libraries under long-term contracts.

Rovi is never again going to be seen as a hot growth stock. The company’s sales base is now too big, and we’re no longer in the early innings of the streaming media revolution. Still, it appears as if double-digit sales growth will return in 2013 and 2014 (analysts are forecasting low-teens growth, and project sales will hit almost $1 billion by 2014). 

Risks to Consider: As is the case with any turnaround, you may need some patience. Rovi’s shares represent clear value now, but it may take several quarters before investors trust that 2013 will be a year of solid growth. Management has lost some credibility by lowering guidance on several occasions, and shares won’t rebound until it’s raised. Don’t expect that to happen in the upcoming second-quarter earnings report.  

Action to Take –> Investors should also heed the patent angle. Rovi has more than 5,000 patents, and in recent quarters we’ve seen a number of companies sell big chunks of patents for large sums of money. It’s not clear if management intends to go that route, but it could be good news for shareholders if it does.

Simply looking at projected 2013 profits makes this an awfully cheap stock. Analysts expect Rovi to earn $3 a share in 2013, implying a forward multiple of just seven. If that multiple expanded up to the 2013 earnings growth rate, then shares would likely move from a current $21 back into the mid-$30s. That’s an insulting figure for investors that owned this stock when it was $65 in early 2011, but solid upside for investors that are new to this name.