Background: Interdigital is a wireless technology developer using its bazillion patents to collect royalties and past dues from companies that inadvertently use their technology. Low capex, high profit and they contain patents covering all sorts of wireless technology. A little overlooked with regards to 3g technology (Qualcomm clearly won that battle), they have pushed forward to acquire patents essential to 4g.
Stats: 2.07 billion MC, 1.57 billion Enterprise value. EV/EBITDA: 7.18, P/S 5.88, 5 year EPS growth of 12.5% giving a P/E/G ratio of 1.28, 564 million in cash/ST investments on hand. 15X average(5year) FCF gives a MC of 3 billion. Piotroski score of 4.
The Good: If 4g is anywhere as close and as profitable as 3g then they could stand for a windfall. With numerous patents it is estimated that IDCC has up to 18% of essential LTE patents. Other major players include Samsung, LG, Qualcomm and Nokia.
During its liquidation Nortel has seen a bidding war emerge over its LTE patent portfolio. Management at IDCC declined to participate saying it wasn't in their best interest as much progress had been made research wise internally and numerous other patents existed to be purchased at a better price. The CFO has stated that every patent that becomes (key word is becomes vs. deemed) essential has a NAV of ~900 million. If we take the link at its word it creates a potential MC of over 15 billion, approximately 7x today. This of course excludes potential oversights the consultant group had and patents they missed.
Initiated a dividend at a rousing 0.10/share (0.9% yield) and clearly intends to grow this down the road. At a payout ratio of ~4% me thinks this will be achievable.
The Bad: I hark back to Michael Burry's post on Qualcomm. He basically said that nobody really knew if Qualcomm was going to be the next greatest thing and if you did say it, you were merely guessing. I find that all too telling here. Nobody has a clear large advantage currently in LTE. I don't want to read through thousands of patents and even if I did my degree in chemistry would bring little advantage to the world of networking and electrical engineering.
Management doesn't seem very aggressive in terms of pursuing litigation. What little it has gone after is perplexing because the biggest suits have been filed against Nokia and Samsung.
Issuance of debt recently, 200 million of preferred convertibles. Convertible price is well above market price, mid 50's I believe.
Overall: Not being an expert in LTE and lacking time to read 5000 patents I can't feel safe about purchasing IDCC currently. If the market were to greatly overreact and send this below 30/share I would consider a purchase. At roughly 1.3 billion MC you would get the business for cash on hand and the assumed value of 1 essential LTE patent. Otherwise I would feel as if I am guessing and frankly I don't want to buy a basket of 4g companies just to see all but one become obsolete. Given the knowledge from reading the consultants work above and looking at everything from a pure value standpoint I now defer my attention to Nokia as a value play and potential LTE candidate.
7/20/2011 well quite the run up with idcc over the past two weeks between the BOD pursuing alternatives and the nortel sale. Although I missed it all I stand by my lack of information necessary to adequately determine a margin of safety. The alternative, of course, was a permanent loss of capital. In the future a business like this carried an immediate catalyst (nortel auction) and a second boost (BOD seeking alternatives). Recognizing the first could have arguably helped me establish my base of value. On ward we go.
8/28/2011: Through my readings of the patent literature and trying to assign value I've turned around to the potential value that IDCC offers and more importantly the margin of safety currently available. As anyone would have loved to jump into IDCC a few months ago at 35/share (five over my intended price target, grrr...) the run up in my eyes doesn't negate the margin of safety. More light was shed on the potential value so here goes.
What has changed from my original valuation?
1. Bidding war: A confirmed bidding war has emerged that several sources indicate potential for widespread appreciation of patent licensing.
2. Nortel/Motorola valuations. Here are two firm confirmation for the value of the patents. Estimates can vary tremendously but the concluding fact is that a large premium to net present value was paid.
3. Why would management sell out after 35 years? This was something that really struck me. Management has seemed very content to wait and swing for only the big fat pitch. Never in their history have they discussed selling out or "strategic alternatives." All in all rock solid management making good shareholder decisions with no sense of hostile rush.
4. Samsung dropped out due to reports that the price got too high. This leads me to think the price is probably a substantial premium to present MC of 3.14B. Clearly Samsung would have to expect to pay at least a premium to MC...say 4B.
5. Ocean Tomo's reports seem to offer another valuation of patents. Thus far I haven't found any source documenting the poor construction of IDCC's IP portfolio. We know therefore that the IP is worth more than A. Nortel's and B. Motorola's.
I will not offer a definite price target only the belief that there remains a marked reduction in downside due to the recent patent frenzy. Should management fail to secure a bidder or only a partial bid emerge there would likely be a sharp decline in share price.
Probabilistically I feel good odds on this given the information present and the near term catalyst exposed (Labor day is the expected start to outright bidding).
Long IDCC with the hopes that I'm not anchoring.
Stats: 2.07 billion MC, 1.57 billion Enterprise value. EV/EBITDA: 7.18, P/S 5.88, 5 year EPS growth of 12.5% giving a P/E/G ratio of 1.28, 564 million in cash/ST investments on hand. 15X average(5year) FCF gives a MC of 3 billion. Piotroski score of 4.
The Good: If 4g is anywhere as close and as profitable as 3g then they could stand for a windfall. With numerous patents it is estimated that IDCC has up to 18% of essential LTE patents. Other major players include Samsung, LG, Qualcomm and Nokia.
During its liquidation Nortel has seen a bidding war emerge over its LTE patent portfolio. Management at IDCC declined to participate saying it wasn't in their best interest as much progress had been made research wise internally and numerous other patents existed to be purchased at a better price. The CFO has stated that every patent that becomes (key word is becomes vs. deemed) essential has a NAV of ~900 million. If we take the link at its word it creates a potential MC of over 15 billion, approximately 7x today. This of course excludes potential oversights the consultant group had and patents they missed.
Initiated a dividend at a rousing 0.10/share (0.9% yield) and clearly intends to grow this down the road. At a payout ratio of ~4% me thinks this will be achievable.
The Bad: I hark back to Michael Burry's post on Qualcomm. He basically said that nobody really knew if Qualcomm was going to be the next greatest thing and if you did say it, you were merely guessing. I find that all too telling here. Nobody has a clear large advantage currently in LTE. I don't want to read through thousands of patents and even if I did my degree in chemistry would bring little advantage to the world of networking and electrical engineering.
Management doesn't seem very aggressive in terms of pursuing litigation. What little it has gone after is perplexing because the biggest suits have been filed against Nokia and Samsung.
Issuance of debt recently, 200 million of preferred convertibles. Convertible price is well above market price, mid 50's I believe.
Overall: Not being an expert in LTE and lacking time to read 5000 patents I can't feel safe about purchasing IDCC currently. If the market were to greatly overreact and send this below 30/share I would consider a purchase. At roughly 1.3 billion MC you would get the business for cash on hand and the assumed value of 1 essential LTE patent. Otherwise I would feel as if I am guessing and frankly I don't want to buy a basket of 4g companies just to see all but one become obsolete. Given the knowledge from reading the consultants work above and looking at everything from a pure value standpoint I now defer my attention to Nokia as a value play and potential LTE candidate.
7/20/2011 well quite the run up with idcc over the past two weeks between the BOD pursuing alternatives and the nortel sale. Although I missed it all I stand by my lack of information necessary to adequately determine a margin of safety. The alternative, of course, was a permanent loss of capital. In the future a business like this carried an immediate catalyst (nortel auction) and a second boost (BOD seeking alternatives). Recognizing the first could have arguably helped me establish my base of value. On ward we go.
8/28/2011: Through my readings of the patent literature and trying to assign value I've turned around to the potential value that IDCC offers and more importantly the margin of safety currently available. As anyone would have loved to jump into IDCC a few months ago at 35/share (five over my intended price target, grrr...) the run up in my eyes doesn't negate the margin of safety. More light was shed on the potential value so here goes.
What has changed from my original valuation?
1. Bidding war: A confirmed bidding war has emerged that several sources indicate potential for widespread appreciation of patent licensing.
2. Nortel/Motorola valuations. Here are two firm confirmation for the value of the patents. Estimates can vary tremendously but the concluding fact is that a large premium to net present value was paid.
3. Why would management sell out after 35 years? This was something that really struck me. Management has seemed very content to wait and swing for only the big fat pitch. Never in their history have they discussed selling out or "strategic alternatives." All in all rock solid management making good shareholder decisions with no sense of hostile rush.
4. Samsung dropped out due to reports that the price got too high. This leads me to think the price is probably a substantial premium to present MC of 3.14B. Clearly Samsung would have to expect to pay at least a premium to MC...say 4B.
5. Ocean Tomo's reports seem to offer another valuation of patents. Thus far I haven't found any source documenting the poor construction of IDCC's IP portfolio. We know therefore that the IP is worth more than A. Nortel's and B. Motorola's.
I will not offer a definite price target only the belief that there remains a marked reduction in downside due to the recent patent frenzy. Should management fail to secure a bidder or only a partial bid emerge there would likely be a sharp decline in share price.
Probabilistically I feel good odds on this given the information present and the near term catalyst exposed (Labor day is the expected start to outright bidding).
Long IDCC with the hopes that I'm not anchoring.
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