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"Getting a patent is uncorrelated to any positive attributes, and just serves to allow either money or wasted effort to be extorted from generally unsuspecting and innocent people or companies" - John Carmack

As a developer/hacker at heart, I absolutely despise companies like Vringo (VRNG). It is one thing to be working on a neat product or algorithm with "secret sauce" and filing a patent for a piece of technology or invention to protect your (hopefully non-trivial/novel) work. It is completely another to simply try to build a business model on suing people. Rambus (RMBS) tried to do so. For a while, its stock got pumped up to ridiculous levels on hopes that it would extort obscene amounts of money from Micron (MU) and Hynix on accusations of price-fixing to drive Rambus out of business. Of course, that didn't work out, and now the company pretty much produces nothing of value.

RMBS Chart

RMBS data by YCharts

While I'm not here to talk in too much depth on Vringo's prospects as a patent troll, I will say that with a quarterly R&D budget about the size of what Google (GOOG) probably spends on electricity for its datacenters in a month, its long term prospects at this suing-people gig are fairly limited.

VRNG R&D Expense Quarterly Chart

VRNG R&D Expense Quarterly data by YCharts

What I want to talk about is how I knew Vringo was (and still is) a clear short above $4. The retail investor was likely too caught up in the hype of the trial that these very obvious clues passed them right by. It is my hope that the next time this happens (and it usually does in profitless small-cap companies), investors will take the opportunity to sell - or, more boldly short - into any pop.

Secondary Offerings - They're Selling, So Should You

Vringo's was a mere penny stock, trading under $1 before all of this Google trial business. However, as the prospects of a win against the search giant (which, I must emphasize, has enriched nearly everyone's lives with its products) grew more likely, the stock price began to creep on up. When the stock reached the $4.35 level, the firm - like a savvy short seller - took advantage of the hype and announced yet another secondary offering of 10.34M shares. There was no underwriter for the secondary - only assurance from the company that "five existing institutional holders" would be acquiring the shares.

But wait! Vringo is no stranger to just printing lots of free money to fund its lawsuit crusade. In fact, just this August, Vringo engaged the printing presses to sell 9.6M shares at $3.25 - below the most recent close of $3.54.

The company very strategically sells into pops - just like any short seller with insider information (and no fear of the SEC) would.

Insider Selling - Who Would've Thought?

Another tell-tale sign is that the insiders have been dumping shares big time. In particular, CEO Andrew Perlman, CFO Ellen Cohl, CTO Andrew Lang, and COO Alexander Berger - the entire top brass - have been quite content to unload shares (or exercise options and then unload shares) of this company (that they paid next to nothing for) whenever the stock punches through the $4 level.

(click to enlarge)

I see no evidence of any insider buying ever since the company first went public by selling 2.4M shares at $4.60 (note that the company's secondary offerings over the last several months have dwarved the IPO in magnitude).

So not only is the company selling, but the folks who run the company are unloading too. That's two strikes.

The Google Win - Not So Sweet, Was It?

While Vringo hoped to extort about $500M from Google, the actual trial led to a $30M win with a recommended royalty rate on Google's AdWords revenue of 3.5%. Some estimates put this deal at being worth $500M spread out until 2016.

That's nice, but this is assuming:

  • The ruling is upheld
  • Google is unable to find a workaround in the case that the ruling is not upheld
  • This number is anywhere close to the real value

According to a piece by SA's Modernist, the ruling is likely worth far less than $500M and actually more along the lines of $150M. In this case, the company is already overpriced at a market capitalization of just over $200M, especially given that the firm has essentially non-existent revenues and is cash-flow negative.

Suing ZTE...

After acquiring 500 patents from Nokia (NOK), Vringo had the audacity to sue ZTE in Germany with its newfound patent war-chest. This probably won't succeed, especially since Nokia wouldn't have sold the patents if they were so valuable.

Conclusion - Don't Feed This Patent Troll

Don't feed this patent troll. While Vringo parades around trying to sue honest companies to try to make a couple of million bucks, it is easy to see what's really going on here: build up hype so that the company can essentially get free money through secondaries and pump the stock up so insiders can exercise their options.

Short this above $4. Or, if you've got enough cash to cushion yourself against a margin call, short it now. The business has no fundamental value as it produces nothing of value. Last quarter's sales of $226K is just more evidence of this.

Source: Why You Should Short Vringo Above $4

Additional disclosure: I may initiate a short position in VRNG over the next 72 hours.