By now, most of the traders and investors following Vringo (VRNG) are familiar with the recent patent trial against Google (GOOG) in which VRNG won a verdict of infringement, validity, a 3.5% past damages royalty rate, and a $30 million award against the Defendants - approximately $15 million of which was levied against GOOG. However, several significant issues remain in play, resulting in high VRNG volatility. Some of these issues include:
- Two pending re-exams in the USPTO challenging the validity of both VRNG patents asserted against GOOG at trial;
- GOOG's attempt to revise downward the 3.5% past royalty on the jury verdict form;
- GOOG's attempts to reverse its liability on multiple grounds at the District Court;
- GOOG's apparent determination to appeal the jury's verdict to the Federal Circuit;
- VRNG's request for a new trial on past damages, to correct an alleged ($140 Million - whoops!) jury error;
- VRNG's attempt to reverse Judge Jackson's laches decision; and
- VRNG's request for an increased amount of future damages.
The chances of success for GOOG's motion (Doc. #847) to postpone Vringo's motion for future royalties was also in debate until Judge Jackson recently granted Google's motion (Doc. #860), as I previously wrote he likely would.
In the discussions of the above and other issues regarding VRNG, I periodically see people disclose that they are short VRNG. This article presents three reasons why, in my opinion, it is a bad idea to short VRNG at this time.
First, the big events listed above are unlikely to occur in the near short term; and the events that are likely to occur in the short term do not carry big downside risk. Of the above issues - each of which carries a real potential risk that should be considered - none of those being pushed by GOOG are likely to be determined in the next month or so. Many will not be determined for several months or longer. Therefore, shorts are left with a near term upside that is determined mostly by general volatility and the longs' potential lack of interest/patience as everyone waits for the hearings and orders on post-trial motions.
Second, there are a number of positive events that could occur in the near term without warning, that could devastate a short position. Naked shorting in VRNG is particularly risky for this reason. VRNG could announce settlements with other companies [Yahoo! (YHOO), Microsoft (MSFT), or companies using GOOG's search] regarding the Lang patents, or with any number of telecom equipment companies regarding the nearly 200 Nokia (NOK) patent properties that VRNG holds. VRNG could also announce the acquisition of additional patents, or the initiation of additional lawsuits on the patents it already holds. A company could announce its intent to acquire VRNG. Any of these, or a (admittedly unlikely) surprise ruling granting a new past damages trial (GOOG's substantive motions, on the other hand, are much less likely to be decided without complete briefing and perhaps a hearing), could cause VRNG's price to jump significantly, causing immediate and significant losses in a short position.
Third, as a result, there is an imbalance right now between how far down and how far up VRNG can reasonably go in the near term. The stock is trading just over $3 now and there is only so far it can go down given the Court's schedule and VRNG's other assets. On the long side, a big announcement could move the stock up much more significantly. The risk/reward is lopsided. Although the stock is volatile, swings in both directions are unpredictable in both timing and magnitude right now, and events that are likely to occur over the next month or so (mainly briefings) do not have sufficient downward potential to justify the risk.
In sum, the timing and risk/benefit analysis counsel against actively taking a short position right now. Although the risks to VRNG are many and real, and you may make some money on the short side given VRNG's volatility, in my opinion you will be holding more risk than is warranted right now. If your long term sentiment on VRNG is short, perhaps wait until the meaningful downside events get closer - perhaps a month or 2, possible more depending on which you think will occur -- so you don't unnecessarily hold the risk of a positive event while there is little chance of a material negative event. At the very least, if you can't resist trading the short side in this volatility, cover yourself with an appropriate hedge. For example, you could use a put spread or buy some way out of the money calls for insurance, but in my opinion the potential for surprise upside events and the limited return make these unattractive right now. To be fair, the stock is so volatile that you may not need to be in it for very long, but I still don't like the overall risk/reward profile of shorting it at this time.
Lastly, if you think you have a short strategy that takes the above into account and has a good risk/reward profile, please tell us all about it below.