Is InterDigital's Stock Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does InterDigital (NASDAQ: IDCC  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell InterDigital's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at InterDigital's key statistics:

IDCC Total Return Price Chart

IDCC Total Return Price data by YCharts.


3-Year* Change 


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

(45.1%) vs. 211.5%


Improving EPS



Stock growth (+ 15%) < EPS growth

59.5% vs. 217.8%


Source: YCharts. *Period begins at end of Q4 2009.

IDCC Return on Equity Chart

IDCC Return on Equity data by YCharts.


3-Year* Change


Improving return on equity



Declining debt to equity



Dividend growth > 25%



Free cash flow payout ratio < 50%



Source: YCharts. *Period begins at end of Q4 2009.

How we got here and where we're going
InterDigital was looking rather strong until we got to the second half of our tests, where it narrowly avoids a complete goose egg with free cash flow payouts barely below the red line. Is this patent-rich company past its prime with four out of nine passing grades, or is could there be improvement ahead? Let's dig a little deeper.

InterDigital trounced expectations in its last quarter, but otherwise has been pretty quiet since selling off a big chunk of its patent trove to Intel (NASDAQ: INTC  ) last year. That had both positive and negative implications, as Intel's price of about $220,600 per patent is significantly lower than earlier patent-driven purchases in the tech sector. Fellow Fool Sean Williams laid out the rationale behind the move rather well when it happened. The problem with the sale is that part of InterDigital's appeal is as a potential buyout candidate. Selling its only real assets off in chunks is likely to result in lower returns to shareholders.

Since the patent sale, InterDigital has been active primarily in the realm of second-tier smartphone makers. Last year, the company kept up its pursuit of Nokia (NYSE: NOK  ) over 3G technology patent royalties, and earlier this year BlackBerry (NASDAQ: BBRY  ) extended its licensing deal for 4G patents. Neither of these events look significant in light of both smartphone makers' shrinking market shares, but InterDigital has managed to push forward nevertheless. With such a significant trove of mobile-focused patents, InterDigital has a stake in smartphone growth no matter which company drives it, and it won't matter much what smartphone margins are as long as InterDigital gets its licensing fees.

The company's also working on the Internet of things, and has recently announced the development of a standardized machine-to-machine platform that should speed adoption by making it easier for developers to implement larger networks of connected devices. And, of course, with InterDigital behind the standardization, it stands to gain some licensing windfall when this exciting new tech trend takes off. That could be what that lifts InterDigital to a better score by the time we investigate it again next year.

Putting the pieces together
Today, InterDigital has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors should understand about the chip giant. Click here now to learn more.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2377660, ~/Articles/ArticleHandler.aspx, 10/1/2016 6:43:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 21 hours ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 4:00 PM
IDCC $79.20 Up +0.44 +0.56%
InterDigital Commu… CAPS Rating: *****
BBRY $7.98 Up +0.04 +0.50%
BlackBerry CAPS Rating: *
INTC $37.75 Up +0.43 +1.15%
Intel CAPS Rating: ****
NOK $5.79 Up +0.07 +1.22%
Nokia CAPS Rating: **