Interdigital - convincing the Street

Saturday, March 1, 2008

Not long ago, after reading my valuation analysis of Interdigital, a reader asked me why the Street did not see it the way I did on Interdigital. Here was my reply.

I think there are at least 3 reasons I can see-

1. Licensing Vs settlements: Wall Street likes consistency and predictability (if there is such a thing when it comes to stock). While IDCC has sufficient IP to demand money from the cellular world, it has predominantly come from legal settlements and not from licensing deals. The uncertainties associated with the legal proceedings are certainly a negative. On the other hand, if it starts to see a steady flow of revenue through pre-inked licenses, things would be a lot different. This will also boost the confidence that the Street has on the company's future.

2. Industry perceptions: The Street's perception will be governed to a certain extent on what the industry's perception of IDCC is. The truth of the matter is that IDCC has so far been seen as an IP shark waiting for the products to come out before sending them a legal notice. Given the past, they see IDCC as more to do with the legal team than the engineers and scientists who continually churn out those patents. So, many leading players in the industry perhaps have a vested interest in making sure that IDCC is low-profile.

3. Need for out-of-the-box thinking: While I mean no disrespect, I do think that there is a tendency to go with the 'masses' in terms of predictions. Most analysts, in my opinion, tend to play it safe and you don't see too much variation in either their perception and/or target prices. This reduces their risks and liability. Also, most analysts are removed from industry events and happenings and tend to employ conventional processses with historic and peer data to value companies. This is likely to yield a poorer 'guess-timate' of any company's value.

My analysis and valuation draws heavily from my close involvment with the 3GPP and other mobile standards. I have also interacted with friends from various companies and so have a sense of the relative IP positions and the geo-political alignment of the industry. Hence my perceptions tend to be a little more educated from an industry perspective. Also, I tend not to look at other reports to have a pre-conceived notion of what its value should be.

In summary, my thesis is that if IDCC has to work the system, it needs to -

1. get licenses with top handset vendors to reduce legal risks.
2. work towards changing industry perception. (I think it is already working towards this through, for example, its chip business and standards participation) These should push its stock price closer to its 'true' value.

We have to wait though, to see how exactly the company plans and executes its moves to convince the street.

Posted by Vijay Nagarajan at 8:00 PM  

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