Please ensure Javascript is enabled for purposes of website accessibility

How NVIDIA Corporation May Have Just Lost Billions

By Steve Symington - May 17, 2016 at 2:34PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The graphics chip specialist's cross-licensing deal with Samsung could have been so much bigger.

Image source: NVIDIA Corporation.

Earlier this month, NVIDIA Corporation (NVDA 1.22%) and Samsung (NASDAQOTH: SSNLF) announced an agreement to settle all pending intellectual property litigation between the two companies, ending a more than year-long legal battle between the two tech giants.

"The settlement includes the licensing of a small number of patents by each company to the other," NVIDIA's press release elaborated, "but no broad cross-licensing patents or other compensation."

That might seem well and good on the surface. But make no mistake: This is not what the folks at NVIDIA wanted to happen. In fact, the graphics chip specialist may be missing out on hundreds of millions -- if not billions -- in potential IP licensing and royalty revenue.

How do I mean? Take NVIDIA's cross-licensing agreement with Intel (INTC 0.84%), for example, under which Intel agreed to pay NVIDIA a total of $1.5 billion in licensing fees over a six-year period starting in 2011. This also means NVIDIA will no longer enjoy those fees from Intel starting next year, forming what Goldman Sachs analyst James Covello described last year as a worrisome "licensing cliff" that, combined with any slowdown of its core gaming graphics card markets, could have painful repercussions on NVIDIA's business.

To be fair, NVIDIA stock has nearly doubled over the past year as of this writing, driven both by its utter dominance of the dedicated graphics card industry (NVIDIA commanded nearly 80% of the entire market at the end of 2015), and by broad strength across its other market verticals. Most recently, last week NVIDIA stock popped as much as 13% after it announced strong data center and automotive sales brought overall revenue growth in Q1 2016 to levels well above management's expectations.

But you'll be hard-pressed to find anyone at NVIDIA as pleased about their recent settlement with Samsung. 

A timeline to (underwhelming) resolution

Rewind to Sept. 2014, when NVIDIA initiated its first-ever patent infringement lawsuit against Samsung and mobile chip specialist Qualcomm (QCOM 0.40%), and simultaneously asked the International Trade Commission to block shipments of the offending products into the United States. According to NVIDIA Executive VP David Shannon at the time, both Samsung and Qualcomm had "chosen to deploy our [intellectual property] without proper compensation to us." In question were the companies' unauthorized use of seven of NVIDIA's 7,000 GPU-related patents, which NVIDIA stated Samsung repeatedly said was "mostly their suppliers' problem."

However, Samsung promptly struck back with a lawsuit of its own. Shannon noted NVIDIA "fully expected we would be sued in response," calling it "a predictable tactic." But Samsung also questionably dragged a small, Virginia-based NVIDIA partner called Velocity Micro into the lawsuit in an apparent attempt to keep the suit in the state, which NVIDIA noted has faster times to trial than most other U.S. jurisdictions. Then, Samsung followed by including in a separate counter suit with the ITC a dozen more small NVIDIA partners that, Shannon lamented on NVIDIA's behalf, "have nothing to do with this fight."

Nonetheless, NVIDIA maintained its original assertion that Samsung and Qualcomm should pay up, and expressed optimism the first case to be decided would be its ITC complaint. And all was looking up as late as April 2015, when NVIDIA offered an update with a pretrial decision from the ITC known as a "Markman ruling." Through that ruling, a judge determined claim constructions favorable to NVIDIA would be applied to six out of seven disputed claims when considering Samsung's and Qualcomm's alleged infringement.

Six months later, however, the case took a step backward for NVIDIA after the same judge issued an initial determination that Samsung and Qualcomm didn't infringe on two of NVIDIA's patents. He also further stated that while they did infringe on a third NVIDIA patent, that third patent was deemed invalid. NVIDIA naturally disagreed, vowing to ask for the ruling to be reviewed by the full six-commissioner U.S. ITC team and to confirm the previous judgment of the U.S. Patent Office that the third patent was valid. Shannon also remarked that the initial determination was merely "one more step in a long legal process."

Fast-forward to this month's settlement, however, and it becomes obvious that NVIDIA decided somewhere along the line that this "long legal process" either wasn't worth the effort or would ultimately prove unwinnable. 

That doesn't mean NVIDIA investors should flee the stock. After all, the settlement had no discernible negative effect on NVIDIA's shares -- something that shouldn't be entirely surprising in light of the broad strength its business has exhibited lately.

As NVIDIA continues to find success in diversifying its revenue streams away from the core gaming market, I'm also confident the company will follow by generating market-beating returns. But as a longtime NVIDIA shareholder myself, I'll admit I'm disappointed with the loss of this potentially massive licensing opportunity.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
$132.12 (0.40%) $0.52
NVIDIA Corporation Stock Quote
NVIDIA Corporation
$168.98 (1.22%) $2.04
Intel Corporation Stock Quote
Intel Corporation
$42.00 (0.84%) $0.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.