How Low Will InterDigital Go?

Shares of InterDigital (Nasdaq: IDCC  ) hit a 52-week low recently. Let's look at how it got here and whether darker clouds are ahead.

How it got here
InterDigital has fallen from its 52-week high of $82.50 set last summer.

At the time, shares popped on news that the company was exploring a "strategic review" that could result in a company sale. The very next day, there was another pop on speculation that search giant and mobile kingpin Google was potentially interested in building its patent portfolio by acquiring InterDigital. History unfolded, and Google's patent play turned out to be Motorola Mobility.

Fast-forward to January, and InterDigital says the strategic review came up short, so it was back to its licensing ways, sending speculative investors fleeing for the exits. A month later the company would report earnings, with full-year revenue falling 24% and net income plunging 42%.

Looks like the patent-trolling business ain't what it used to be.

How it stacks up
Let's see how InterDigital stacks up against other players that rely on IP licensing.

IDCC Chart

IDCC data by YCharts.

Let's throw in some fundamental metrics to take a deeper look.

Company

P/E (TTM)

EPS Growth (MRQ)

Net Margin (TTM)

ROE (TTM)

InterDigital 16.2 (34.6%) 29.7% 21.7%
Rambus (Nasdaq: RMBS  ) NM (542.9%) (21.3%) (15.5%)
Qualcomm (Nasdaq: QCOM  ) 21.8 12.2% 28.1% 17.3%
VirnetX (Nasdaq: VHC  ) NM (255.1%) (86,315.0%) (27.0%)

Source: Reuters. TTM = trailing 12 months. MRQ = most recent quarter. NM = not meaningful.

The only one of those companies not dripping in red ink is Qualcomm, which also has a chip business in addition to its wireless IP licensing -- and that chip business is largely what's driving Qualcomm's growth nowadays.

Rambus has little going for it recently, considering a major legal loss last year and dismal earnings, although it's still looking for an appeal. VirnetX's figures are nothing short of mind-boggling, as its $20,000 in revenue last year doesn't even begin to cover its $17.4 million in operating expenses.

Just because InterDigital looks less bad than Rambus and VirnetX doesn't mean it looks good.

What's next
InterDigital is also scheduled to report first-quarter results tomorrow, with analysts expecting almost $70 million in revenue and earnings per share of $0.31 -- shrinkage on both fronts. I think there's still more downside for InterDigital. Qualcomm is a much better way to play.

Interested in more info on InterDigital? Add it to your watchlist by clicking here.

Fool contributor Evan Niu holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Qualcomm and Google. Motley Fool newsletter services have recommended buying shares of InterDigital and Google. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On April 25, 2012, at 12:37 AM, rick774 wrote:

    Mr. Niu,

    As a long time investor in IDCC for over 5 years I disagree with your characterization of IDCC as a "Patent Troll" . this company for years has performed the research, developed standards in, and patented many essential standards for 3G, 4G, 802 wireless and even a larger number of essential patents for LTE. They are not a company that "trolls" for patents and then acquires them in the hope that they can beat some unsuspecting "honest" company over the head with them.

    Your article is accurate in that they have not maximally monetized their portfolio, and revenues are declining. This however is not because the patents were not invented by IDCC, but primarily because large companies know that it is much cheaper to infringe a patent for years, finance the litigation of an infringement trial or multiple trials, for even decades, and in the end pay only a small fine or damages if the insane justice system and patent system in the US actually doesn't allow them to weasel out of the infringement.

    Qualcomm managed to win initial patent cases years ago and thus everyone knew they would have to pay up for licences. As their license revenue declines they do have manufacturing of chips to support them (at least for now).

    Several companies over the last decade have attempted to function as a "think tank" employing people to invent and then patent good ideas and then just live off the licensing fees (very high margin business), rather than have to actually manufacture the product (can be a very low margin business). Unfortunately the US legal system is neither fast or unbiased in many cases and current trends do not favor the inventor, but rather the infringer of patents. The unfortunate outcome of this is that the small inventor will never be fairly compensated for his idea, and the creators of the next revolution in technology may not be able to keep their business going long enough to be able to develop their next great idea.

    Rick

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