How Should Investors Play Vringo In 2013?

Vringo (UNKNOWN: VRNG.DL  ) is known for three things:

  • A unique video ringtone service. Vringo's Facetone application gives you a selection of licensed video clips to replace boring audio notifications on Apple (NASDAQ: AAPL  ) iPhones and Google (NASDAQ: GOOGL  ) Android smartphones. The app hit a cool million downloads by last February, though I haven't seen any further milestone announcements since then.
  • An extremely volatile stock. Vringo shares have bounced between $0.68 and $5.73 per share in 2012. At today's prices, the stock has more than tripled year-to-date and the beta value is an astounding 2.2. To put that volatility gauge into perspective, the S&P 500 scores a 1.0 beta value by definition. Boom-and-bust drug developer Lexicon Pharmaceuticals (NASDAQ: LXRX  ) plunges and soars with every tidbit of FDA approval news, but its beta value is lower than Vringo's. So yeah, these shares swing both high and low.
  • Courtroom drama of the highest order. After merging with intellectual property holding company Innovate/Protect in March, Vringo suddenly owned a bucket of pending patent infringement lawsuits against AOL (UNKNOWN: AOL.DL  ) , Google, and many more. The company bought some more patent ammunition from Nokia (NYSE: NOK  ) in August. Chinese handset maker ZTE received a brand-new suit (and not the kind you wear to the prom) in October. The potential payout from all these legal actions could run in the billions of dollars. And this is what's driving those crazy share price swings -- Vringo lives and dies by the whims of judges and juries.

Interestingly, the lawsuits have little to do with Vringo's supposed core operations in video ringtone presentation. Instead, they center on search-related patents that Innovate/Protect received from former sector leader Lycos.

Vringo landed a favorable decision on its Google suit in November, but the court placed a $30 million limit on the damages its could claim. Outraged, Vringo has filed motions looking for a retrial regarding the damage awards. The defendants, of course, filed their own papers looking for a new trial regarding the alleged infringements. And the beat goes on.

So Vringo stands at a crossroads. The legal campaign has essentially made Facetone operations irrelevant. Good results in the pending patent cases would send the stock sky-high while negative outcomes or drawn-out appeals could doom the company.

Controversial analyst Jim Altucher of Formula Capital presented a bull case for Vringo where "Google Might Be Going to $0." Google made $67 billion on the back of search and advertising algorithms owned by Vringo. Damages could take all of it back and then triple the total if Google infringed willfully. Hence, Vringo would end up basically owning Google. Not bad for a little upstart with a $50 million market cap at the time. Altucher is an amazing writer and he makes a compelling case for this outrageous outcome. I can't blame Vringo investors for getting all excited about the potential gains.

I've got this bridge for sale...
But that's a pie-in-the-sky scenario. You can't even reach a much smaller billion-dollar verdict unless you believe that Google built its entire business on Vringo's specific patents. And even if you do, as a Virginia jury recently did, it's difficult to assign any particular value to these extremely general patent claims. Hence the disappointingly low damage award, which would refuel Vringo for another four or five years of its typical cash-burning operations but wouldn't make anybody rich.

For Vringo investors, everything hinges on the Google case. Big G has a history of standing up to frivolous lawsuits, and is unlikely to settle for the sake of convenience. I expect both sides to use every weapon in their arsenals here, which leads to a long process of appeals no matter which side happens to win on each stage. This can take a very, very long time.

None of this will be settled in 2013, so Vringo shares will simply keep swinging on rumors and temporary achievements. Until the legal process runs its course, Vringo's stock is more of a poker chip than an investment. This is very similar to fellow patent litigator VirnetX (NYSEMKT: VHC  ) , which also hopes for a huge payday from a portfolio of allegedly important patent claims. The only way to play these crazy stocks is to bet on continued volatility through options.

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Comments from our Foolish Readers

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  • Report this Comment On December 21, 2012, at 7:03 PM, ergon1216 wrote:

    Your "short" -sighted article fails to mention the running royalty that was awarded to Vringo in addition to the piddly $30 million prior infringement damages. Conservative estimates put running royalty value at about $493 million. There is also a very good chance that the laches decision handed down during the trial will go to trial again as a separate adjudication and might just be overturned, resulting an estimated $153 million award.

    Your article leaves the reader with the illusion that Vringo is fighting an uphill battle with Google for a relatively small sum, when in reality Vringo has won every phase of the legal contest up to this point and stands to make at least $500 million over the next four years, after which the patents run out.

    The article seems to me to be biased to the point that it reflects badly on both the author and on the Motley Fool publishing staff.

  • Report this Comment On December 23, 2012, at 8:06 PM, jpatrickmichael wrote:

    The author of the Vrngo author must not have even read a summary of what has been going on with Vringo. In addition to the minimal $30 million for some past damages, there's a possible correction of the $15.8 million vs. $158 million verdict mistake; there's the possible half-billion dollar laches error; there's the new pending ZTE lawsuit for a couple hundred million or so; there's the new platform and products being produced by Lang's Israeli team; there's the unanimous jury verdict for a running royalty rate of Google revenues that will result in some $500 million to $850 million; there are the probable claims for damages for all the other customers who have been using Vringo's patent through Google's infringement; there's the ringtone business, to mention a few.

    Right now an investor could buy in to Vrng for about one-third what would be the almost-guaranteed market cap in about one year, maybe less. But don't tell anybody. Its float is being 87.5% shorted right now.

  • Report this Comment On December 23, 2012, at 8:28 PM, clifffiscal wrote:

    The article is missing many of the most important elements of the case that the two responses note above. In addition, even if everything goes Vringo's way in the final judgement they could never "take it all back" nor is there any chance of "basically owning Google." Vringo can be entitled to a running royalty of 3.5% or something higher or lower on the 20.9 % of Googles earnings that have been found by a jury to have infringed on Vringo's patents. So the royalty rate would be applied to 20.9% of the $67 billion, although this figure is growing each year as Google's ad revenue is climbing steadily.

  • Report this Comment On December 26, 2012, at 1:36 PM, taishiba wrote:

    as can be seen from each and and EVERY comment above this author is recycling MORE AND MORE useless DRIVEL!

    Sorry this does not cut out to be a good analysis...

  • Report this Comment On December 26, 2012, at 2:00 PM, taishiba wrote:

    All negative on VRNG pretend foolishly that Vringo lost...

    They WON big time. The stock will reflect this soon...

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