Vringo: A Patent Play Stock Ready To Explode Again

May.29.13 | About: FORM Holdings (FH)

Welcome followers to Vringo (VRNG), a company that continues to show real staying power against some of the world's largest tech giants. As you may already know, it's under the leadership of President and CTO, Ken Lang and in the early stages of development. Ken, a very astute and brilliant Internet IP inventor attended Carnegie Mellon University. He had a vision and a plan for some patents that he had developed several years ago. There was only one snag. The company that he was employed with was acquired by Lycos, a struggling search engine. Lycos didn't appear to embrace his vision, nor have the funds available to implement his patent strategy, so nothing significant ever came of his innovations; U.S. Patent Nos. 6,314,420 and 6,775,664, entitled "Collaborative/Adaptive Search Engine" and "Information Filter System and Method for Integrated Content-Based and Collaborative/Adaptive Feedback Queries."

Eventually Ken got the financial backing to retrieve his prized patents that he had once hoped could be developed. With these patents in hand, the new company Innovative/Protect could monetize the patents. Ideally if technology firms use his patents, he could sign licensing deals or be forced to take the infringing companies to court.

These patents could very well be the "crown jewel" to increase already existing search engines to perform at peak performance by increasing existing sales like that of Google as much as 20% - 30%. There is some argument from skeptics however who say that Lang's patents were acquired for a pittance and shouldn't be worth what some investors believe to be between $500 million to $1 billion or maybe even more. You know like the story that because someone buys a $1B Picasso at a garage sale for $10 isn't entitled to the PV (present value) today. That's pure hogwash. What might be one man's trash could very well be viewed as another man's treasure, so to speak. The patents were lying dormant remember with Lycos until Lang acquired them. Companies and wealth are built from vision and opportunities taken and not by from merely lying around.

So, is Vringo now a practicing firm as they state in their financials or a non-practicing firm (NPE)? I believe that for the most part it's as much of a practicing firm as technology giant Qualcomm (NASDAQ:QCOM), headquartered in San Diego, who owns multiple CDMA (Code Division Multiple Access) patents.

What's happened following the merger?

Since the merger agreement between Vringo and Innovative/Protect, the new company has made it known that its business strategy is to increase its intellectual property portfolio, add significant talent in technological innovation, and be positioned to enhance its opportunities for revenue generation through the monetization of the combined company's assets. As you may know, Vringo is engaged in the monetization of patents currently held in its growing patent portfolio. Current defendants involved in patent litigation include:

1) Google (NASDAQ:GOOG)

2) ZTE located in China

3) Microsoft (NASDAQ:MSFT) - under settlement talks

The most immediate of these cases involves Google, where investors have been patiently waiting for Honorable Judge Jackson in Virginia, to make a final ruling on the running royalty rate (RR%) for patent infringement despite months in delays. Vringo is asking for 7% RR% of 20.9% of revenues due to Google's continued willful infringement.

Despite the delays involving over 950 court documented filings, I think the longer term investor "story" needs to improve. Investors need more clarity about how all of the various parts of its business are and will be aligned.

Investors have been starved for the company to define a more concrete long term picture. We all know about the Google court theatrics but there needs to be more. Vringo needs more activity with regard to ongoing billable services and activities that are recurring month after month. It needs to be clearer to shareholders and build up a story explaining the different services and strategic plan looking out 3 - 5 years down the road.

What I'm suggesting is that now might be the most opportune time for Vringo to evolve and expand its business plan once again. Possibly away from its "fight hard" litigation strategy into something more investable for the long term. Its current business strategy of litigating patents takes years to come to a final resolution. Shorts understand this and that's why they have been all over this company from the very beginning. Currently, the current short position has grown from 5mm - 10mm to about 17.7 million shares or about 24% of the trading float today.

One has to wonder if it would make more sense to move away from claiming that it has patents and will sue any entity using them, to a more investable strategy to keep investors interested in a much larger strategy? Look at the chart below and tell me if shareholders are here for an investment or for a quick trade?

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Institutions that hold stocks with a long term strategy in mind are what drives a stock up year after year, not retail traders or day traders. So, wouldn't it be wise to develop a strategy that is more palatable to get the stronger institutions to want to get on board here to buy and hold as the company develops? Possibly, adopting a strategy more like the following:

Vringo = The Goldman Sachs of Patent Advisory Firms

I'm talking about adapting to an improved story out evolving into a publicly traded patent advisory firm. A reputable and knowledgeable team that provides services for patents like Goldman Sachs (NYSE:GS) does for the financial services industry. These services might include:

Patent Intelligence / Solutions / Advisory Services

Technology Patents to Biotech Patents?

√ Structure Patent Partnerships

  • Selling Your Patents For Shares

  • Revenue Sharing Deals

√ Advise on Patent Acquisitions

√ Advise on Patent Portfolios

√ Patent Valuations

I think that the initial perception of this company was that it held some patents and it was going to sue any and all of the alleged infringing parties. Companies will either pay a "reasonable settlement" to avoid a long egregious litigation process or engage in a "fight hard" strategy that might take years to resolve. These are binary events and as such, the stocks that trade with these events (much like biotech stocks before an FDA ruling) tend to trade erratically up and down depending on the outcome.

Some traders are ok with binary events, but most investors will not stand for such antics month after month unless the story consistently improves. A solid company must evolve and generate growth from revenues to keep retail and institutional traders on board or they will leave. Individual investors and strong institutions buy a story when it's absolutely clear about what a company does.

What I am seeing here is confusion among the retail investors and the valuation of its patent portfolio. Quite frankly no one is sure how to value the patents that it currently holds, like the 500 Nokia (NYSE:NOK) patents. When the Nokia patents were was announced the stock was $3.33 per share. Today it's around $3.00. It should be higher.

Investors in Vringo really don't understand what this company is all about over the longer term. People appear to only be focused on the outcome of the early Google trial, which they won back in 2012, but have waited seven months for a final resolution.

I think if you asked a current shareholder they might say; Vringo is a company suing Google over two patents and ZTE (OTCPK:ZTCOF) over some patents in Europe that they acquired from Nokia and that's it.

Also, let's not forget that Vringo disclosed weeks ago that it is in settlement negotiations with Microsoft as well. I suggest that they sell the coveted search patents to Microsoft. They could use the funds to build an alliance with them and/or work on building a build a better strategic plan.

In Summary:

Vringo is building a strong management team and large portfolio of patents. Most investors got involved because they believe that the management team is full of leaders (Perlman, Lang, Berger), accomplished litigators (Don Stout and David Cohen) and passionate technology innovators. You might say that its team is one of the very best in this new space. This is why longer term investors have bought and held its shares.

Now, with that being said, I believe that Vringo needs to continue to build on its strategy and load their pipeline with more opportunities or deals. It needs more activity with additional patents, services and partnerships. It would be ideal for it to even out the binary events that are currently taking place month after month.

As it stands, I strongly believe that the company is grossly undervalued and should be trading over $5.00 right now. The short position has artificially pressed the shares down in the meantime. This could all change and fast. With favorable news from Judge Jackson (that could happen at almost any time) with a RR% ruling against Google of between 5% - 7%, followed by an estimated $150MM - $200MM settlement coming in from Microsoft, the stock could lift hard and fast.

It's not too far-fetched in thinking that it could be on a path to new YTD highs with a few more positive announcements and massive short covering. You cannot deny that it has shown "real staying power" by going up against large tech giants like Google and Microsoft. Also, as far as the ZTE (in China) patent suits go, the threat of an injunction there this summer is a real threat to ZTE's business in Europe.

Lastly, with any positive developments announced from their current cases, investors could see additional momentum in the stock that could very well lead to the $7 - $8 level or even higher sometime in the next 6 months.

Disclosure: I am long VRNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.