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Buy, Sell, or Hold: InterDigital

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It would seem that the near- and mid-term future for a company that offers wireless connectivity solutions and improved bandwidth worldwide would be golden. But blanket assumptions can lead to nasty surprises for investors, so let's take a closer look at why you might want to buy, sell, or hold InterDigital (Nasdaq: IDCC  ) .

Lots of InterDigital's numbers look quite promising. Its revenue and earnings have been growing by double digits, and their growth rates have been growing, too. Over the past year, revenue grew 33%, and earnings 76%. When earnings grow faster than revenue, it suggests that the company is becoming more efficient, wringing more profit out of each dollar of sales than before.

Meanwhile, those net profit margins are fat, topping 30%, while the stock's forward price-to-earnings (P/E) ratio is just 16, suggesting that it's not wildly overvalued at all.

On the negative side, InterDigital ranks near the bottom of its industry in terms of research and development (R&D) spending. That's not auspicious, since investments in R&D can lead to new technologies, patents, licensing deals, and profits. Of course, a company can choose to just buy new technology instead, and InterDigital has done a fair amount of that.

Another issue of concern is the arena in which InterDigital competes -- that of technology patents. As my colleague Anders Bylund has pointed out, the system is broken, with many companies (and consumers) hurt when some companies are able to patent algorithms or ideas. Companies such as VirnetX seem to be basing their business models around patent litigation, while others, like Universal Display, are focused on patents, but also spend significantly on R&D and maintain profitable operations. It's useful for investors to distinguish between the two.

A big reason to consider staying on the fence about InterDigital is that it has expressed interest in putting itself on the block, partially or completely. If such a sale happens, shareholders will see a big chunk of change arrive -- presumably more than $1 billion and potentially several billion.

But there doesn't seem to be a long line of companies bidding for InterDigital. And even if the company is sold, that will leave shareholders with either some money or shares of the acquirer -- whose attractiveness is not yet known. That's not the ugliest proposition. Receiving a chunk of change is nice, and if you get shares of the acquirer, those can always be sold.

Speculation abounds on which company or companies might be interested in InterDigital. Patent-grabbing is of great interest to many. Google and Intel were recently outbid for Nortel Networks' patent portfolio by a group of companies including EMC and Research In Motion.

In the meantime, the company is positioned to profit from patent-licensing deals, which can be announced at any time. But that kind of uncertainty can make it hard to value the company.

The verdict
InterDigital certainly has a lot going for it, but ideally, I'd rather be invested in a company that seems committed to growing and building its business rather than putting itself up for sale. Such a company would have a more unlimited upside.

I'm cautiously bullish on InterDigital's future, but for now, I think I'll steer clear.

If you're in the market for another portfolio candidate in the wireless connectivity field, check out -- for free -- our special report, "The Next Trillion Dollar Revolution," which details a company set to benefit strongly from the mobile revolution.

Longtime Fool contributor Selena Maranjian owns shares of Google and Intel, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of EMC, Google, and Intel. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, Universal Display, Google, and InterDigital. Motley Fool newsletter services have recommended creating a bull call spread position in Intel. 

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 10, 2012, at 11:45 AM, jonluxy wrote:

    Here goes: IDCC has one of the strongest portfolios in 4G wireless technology out there, and since demostrating the first wireless phone back in 1974 they have maintained the lead in the wireless technology sector. They own the fundamental IP underlying TDMA, CDMA, 2G 3G and 4G LTE wirelss technologies. There is a consensus that they own the highest quality and most innovative 4G LTE patent portfolio which is very valuable. So apparently their R&D spending, which may be lss than a few others, has been highly effective and well directed. As far as their putting the IP & company up for sale, as a long I feel this was a good decision, so I disagree here with the author. It indicates a smart management oriented toward providing shareholder value. You see the company as traded on the stock market values the patents according to accepted accounting rules, at cost, which is negligent relative to their current market value. Look at it this way. The company is valued at less than 2 billion as traded in the stock market. The market value based on the patents being valued at market, exceeds 6 Billion dollars based on most conservative estimates. And this is significant because deep pocketed OEMSs are currently interested in buying these patents. The R&D team has been valued at over $600 million by Mpartners in a sum of the parts analysis. The reason their patents are so valuable as standalone assets, is that the major OEMs are engaged in a patent based battle for market share. They are using patents not only for differentiating their products but to block competitors from entering different markets around the world. Not a long list of bidders, but nonetheless ones with deep pockets: allegedly MSFT, AAPL, GOOG, QCOM, INTC are among those bidding or considering bids. I believe a buyout would result in a triple digit (over $100 at least and more likely in the $140-180 range stock price and possibly higher based on the average amount paid for wireless patents in 2011 and discounted). If they are not bought out, they own the IP upon which the 4G LTE standards are based. This promises to be their most lucrative portfolio yet and 4G has only begun to take off, so I expect IDCC to reach well into the triple digits by 2014-15 regardless. Apple plans to upgrade their iPhone to 4G this year (spells new or revised IDCC / AAPL License). Revenue will be much higher if CAFC decides in their favor on the NOK, LG case (which LG is looking to settle with a frand rate set by a court arbitration since they know they are liable but want a lower rate than being asked). IDCC is sitting on half a billion in cash, net of debt. They pay about a 1% dividend as well in the mean time. I recommend considering having some shares in your tech portfolio at least - I am very overweighted in my portfolio but risk tolerance and investment horizons vary from one investor to another - so I am not advising you to buy, but to consider. It is always up to you.

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