Last Monday, Seeking Alpha's Justin Giles penned a rather optimistic piece laying out Vringo's (NASDAQ:VRNG) "forthcoming catalysts". In the piece, Mr. Giles references my rather pessimistic article about Vringo's prospects, and offers the platitude "patience pays off", as an alternative investing hypothesis. As I read his article, I was often wondering why he believed more court dates are "catalysts", when history shows that nothing could be further from the truth. In particular, he suggested that the upcoming settlement conference between Google and Vringo will finally bring resolution to this case. Yet, he offers no reason or logical argument for why this will be the case this time around. Again, if history is any guide, this will be another hollow catalyst etched in the annual Vringo calendar.
With that out of the way, I have to say that I don't have an axe to grind with Mr. Giles, but I believe his optimism is symptomatic of the problem surrounding investors in patent plays like Vringo. My entire point in my last article was that patience was basically a waste of time with Vringo for two reasons:
1. Vringo management is not proactive about creating shareholder value.
2. Vringo shares will not increase in value until the money is in the bank.
In short, there have been myriad court dates come and gone that were supposed to be significant catalysts for the stock. And predictably, nothing happened (more on this below).
Secondly, Vringo's management has done nothing to fight off shorts-who are quite literally killing this stock. Unlike other companies with high short interests like Questcor Pharmaceuticals (QCOR) that take a proactive stance against shorting, Vringo's management has chosen to put their heads in the sand, hoping the shorts miraculously disappear. I previously criticized the company for failing to inform investors about the ZTE case in India because it could have helped boost the share price. Yet, management still hasn't commented on this process in a meaningful way. To reiterate my argument against investing in Vringo as it stands, the company is being run like a legal case, not a business. Mum's the word...
And yesterday's action in Vringo is proof positive of my argument.
As a refresher, a German court issued an injunction against ZTE for its infringement of two patents held by Vringo. In Pre-Market trading, Vringo shares seemed like they were ready to explode, climbing nearly 9% in short order. But because there was no follow up press release from Vringo to add color to this development, shares actually finished in the red. This scenario has unfolded time and again with Vringo. So I fail to see how exercising patience is a smart move with this one. If anything, this latest event is resounding proof that an investment in Vringo is dead money for the time being.
What has become painfully obvious at this point is that there are immense forces working against Vringo shareholders, and nothing short of "money in the bank" is going to change this issue. Unlike developmental biotechs that can soar based on seemingly nothing, Vringo is a show me stock. In other words, the market is not going to radically revalue Vringo shares until its fundamentals improve. And therein lies the problem.
My bet is that the forces working against Vringo are hoping the legal process drags out long enough that the company has to offer a fairly large secondary, dropping share price along with it. As things stand, that could happen by the middle of next year.
As I see it, the ZTE case appears to be the only way for Vringo to avoid a secondary next year. If you're counting on Google folding anytime soon, you might want to put your head back in the sand.
Again, good luck Vringo longs.