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|Company||RPX (Nasdaq: RPXC )|
|Stock Price at Underperform Recommendation||$11.64|
|Headquarters||San Francisco, California|
|Market Cap||$617 million|
Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.
This Week's Pitch
RPX Corp. is a fast-growing company in a niche industry: patent defense. The company provides a subscription-based patent risk management solution that facilitates more efficient exchanges of value between owners and users of patents compared to transactions driven by actual or threatened litigation.
The company's fundamentals are outstanding, which is surprising for such a young company -- (founded in 2008 and went public in May of 2011). As of the most recent quarter (6/30/12) the company had approximately $220 million in cash and investments on hand versus less than $5 million in debt (including operating leases). The company is also growing at an astonishing rate. For example, in 2011 revenue increased by over 62% from the year before. While it's impossible for any company to continue to grow at a rate that high for any length of time, I don't think it would be crazy to assume that this company can continue growing in the 15% to 20% range for a very long time (since this is a young industry with lots of growth potential). The company is also profitable (based on GAAP earnings); however, the company's true earnings, or "owner earnings," are negative. The reason owner earnings are negative is because the company is spending a ton of money on "the acquisition of patent assets." For example, the company spent over $101 million on acquiring patent assets in 2011 alone, almost 7 times as much as its main competitor -- Acacia Research [ (Nasdaq: ACTG ) ]. I believe this will help RPX in the long run, because the company will have a larger portfolio of patents, which will attract more customers.
I also believe that RPX is developing somewhat of a competitive advantage or "economic moat." RPX's business model has a "network effect," because as the company adds new clients it generates new subscription fees that can be used to fund additional acquisitions of patent assets. These acquisitions enable RPX to add new clients and to deliver greater value to the company's existing clients.
Kleiner Perkins Caufield & Byers (KPCB), one of the most successful venture capital firms in the world (paid $25 million for a 20% stake in Google in 1999), owns about 15.21% of the shares outstanding. This should give investors even more confidence to invest in RPX.
Overall, I believe RPX is an outstanding business with lots of growth potential and currently selling (trading) at a very low valuation. Those who are patient will be greatly rewarded by investing in this stock.