Season Investments


Micro Update: InterDigital

Posted on January 12, 2012


InterDigital (ticker: IDCC) develops and patents wireless technologies that are fundamental to mobile devices and networks worldwide. Their business model is fairly simple: develop cutting edge mobile technology, patent the new technology, and license it out to major wireless companies globally. This industry is growing rapidly as more end users upgrade to smart phones which consume more data and bandwidth. The ever growing thirst for more data over wireless networks plays perfectly into IDCC’s hand as they hold a number of key patents in the next generation of mobile networking known as LTE or 4G. 

Right now there is an “arms race” in LTE mobile patents as mega-cap companies like Apple, Google and Microsoft are all paying top dollar to carve out a presence in this space. Last year there were two major LTE patent acquisitions. In July, a consortium of companies purchased all of Nortel Network’s patents out of bankruptcy court for $4.5 billion. Apple was one of the members of the consortium and is rumored to have put up $2 to $2.6 billion to secure exclusive rights to the LTE patents in the Nortel portfolio. Google responded a month later by purchasing Motorola for $12.5 billion with the patents estimated to be worth around $5 - $7 billion. It was around this same time that buzz began to grow around IDCC’s patent portfolio, which is said to dwarf Nortel’s LTE portfolio, as management made it publicly known that they would “explore potential strategic alternatives” including a sale of the company. After the announcement, the stock almost doubled in the span of a week but has since come back down to pre-announcement levels as no sale announcements have been made and the market has grown impatient with the process. 

We like IDCC for the following reasons:

  1. The standalone business without a patent sale is still a leader in a rapidly growing market with a history of growing both the top (revenue) and bottom (earnings) lines.
  2. Management at InterDigitial could be taking their time to unlock maximum shareholder value in any type of sale. Nortel’s patent auction took 12 months to complete and we are only 6 months removed from IDCC’s initial comments.
  3. The current price provides a reasonable margin of safety. IDCC is currently trading at a market value of just under $2 billion which factors in the future earning potential from their highly skilled team of  engineers in addition to the assets/patents of the company. Based on our discounted cash flow model, we think the stock is undervalued by close to 25% without factoring in the value of the patent portfolio, which is conservatively estimated to be worth an additional $3 billion based on recent competitive patent sales. 

No investment is without risk and IDCC is no exception. If a sale of the company or the patent portfolio is never realized, then whatever “buyout premium” currently exists will eventually disappear and be a drag on the stock price. As with any stock investment, there are the major macro risks of a global economic slowdown that could weigh on the stock (a sinking tide lowers all boats). Lastly, due to the nature of IDCC’s business, their revenue and earnings streams have been choppy in the past which has led to a good amount of volatility in the stock price. Ultimately, we think that the reward-to-risk profile of IDCC is heavily skewed toward the reward end of the spectrum and as such have decided to make it a key holding in our “satellite” equity portfolio. 

We want Transparency to be one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. Regular Micro Updates will address our reasoning behind making specific investments. Also watch for Macro Updates to stay in tune with our perspectives on broader economic and capital market topics.

This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.