Investors that look to short stocks seek out two kinds of investments: those that are simply overvalued, and those that may go out of business. The latter are known as a “terminal short,” (as in terminally ill), and though they are rare, they can be very profitable.

Parsing TiVo’s (Nasdaq: TIVO) fiscal second quarter results that were released Wednesday evening, you’ll find a company that is beginning to lose altitude. And as you look out into the future of TV and Internet programming, it’s hard to see how the company will remain as a compelling choice for either consumers or its media partners.

Back in the red
As young companies like TiVo are in growth mode, they are excused from the need to show positive cash flow. The company’s sales rose nicely through the middle of the past decade, but growth sharply slowed in fiscal (January) 2008 and has since turned negative. Trouble is, the company was only able to generate positive cash flow in fiscal 2009, but is once again back in negative cash flow mode. That’s worrisome enough. TiVo’s revenue base is also starting to shrink, making it increasingly unlikely that the company will ever reap robust profits.

In the just-announced second quarter, TiVo saw sales slide -10%, and the company lost $15 million from operations. Quarterly revenue, which hit $68 million two quarters ago, fell to $51.5 million in the most recent quarter.

Why are sales falling? Because cable companies, TiVo’s biggest customer segment, are increasingly using proprietary digital video recorders (DVRs), which can be bought at a lower cost. TiVo’s customer base has fallen to 2.38 million from 3.04 million a year ago.

This highlights the major flaw in TiVo’s business model: The company’s technology, although user-friendly, is not compelling enough to beat back cheaper digital set-top boxes made by rivals such as Cisco Systems (Nasdaq: CSCO) and Motorola (NYSE: MOT). The company suffered a major legal setback in May when courts found that many of TiVo’s key technologies were not necessarily being violated by DISH Network (Nasdaq: DISH). TiVo’s other pending lawsuits against companies like Verizon (NYSE: VZ) and AT&T (NYSE: T) suddenly look expensive and possibly unwinnable.

It gets worse: the next generation of TV sets is expected to meld traditional television and web content on one platform. Companies like Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL) have grand plans to offer DVR-like programming software for those next-generation TV sets. Google, in particular, has shown a willingness to give away free licenses for use of its Android software, which would make TiVo’s economic proposition even more dubious to cable and satellite operators.

Desperate for growth
If you weren’t aware of TiVo’s troubles, you’d think the company is doing just fine if you read the company’s second-quarter press release. Management highlighted a range of growth initiatives both here in the United States as well as in the United Kingdom and Spain. But those new efforts are simply slowing the rate of decline that TiVo is experiencing with existing customers such as DirecTV (NYSE: DTV).

Action to Take –> Shares of TiVo are not likely to plunge to zero quickly. The company still has more than $2 a share in cash, and it would take an extended period of losses for cash to be completely depleted. And as a key risk to this short thesis, there is a small chance that courts will eventually still rule in favor of TiVO in its various patent lawsuits. That’s why shares are still hanging in there at the $8 level.

If and when it becomes apparent in any eventual legal resolution that TiVo’s patent portfolio will not yield a high amount of royalties — which looks increasingly likely — then shares could quickly fall below $6. From there, it might be a slow and steady demise for this terminal short.