Last week I wrote an article titled These 4 Small-Cap Stocks Should Produce Big Gains In 2014. In that article, I wrote about Vringo (VRNG) and how it has the potential to reward investors with massive gains this year because of the many catalysts the Company has lined up this year.
True to form, investors woke up Wednesday to find out that Honorable Judge Jackson issued his Memorandum. In the Order, Jackson found that Google's (GOOG) alleged work-around is nothing more than a colorable variation and subsequently issued that I/P Engine (Vringo's subsidiary) is entitled to ongoing royalties as long as Google continues to use its "modified system."
This decision was a huge blow to Google and a monumental win for Vringo as it continues to fight Google in what seems to be a never ending battle between the two parties. Now that the biggest risk to Vringo has been taken out, all that is left now is to see whether or not both parties will come to a settlement agreement, or what percentage Vringo will receive from Google in ongoing royalties through 2016.
Royalty Rate Decision
On November 6, 2012, a jury ruled in favor of Vringo awarding the Company not only damages of $30.5M but also a running royalty of 3.5%. Vringo has asked the court to raise the royalty rate to 7% from 3.5%, based on Google's willful infringement.
"Defendants' ongoing infringement is undisputedly willful. Defendants are fully aware that their use of AdWords has been adjudged to infringe all of the asserted claims of the valid and enforceable patents-in-suit. Judgment has been entered against them, and yet they continue to infringe."
"For these reasons, and as set forth in its moving papers, I/P Engine respectfully requests that this Court enter an Order requiring that, for the period from November 20, 2012 through April 4, 2016, Defendants pay I/P Engine ongoing royalties computed on a base of 20.9% of Defendants' U.S. AdWords revenues, at a running royalty rate of 7% of that base for Defendants' continued willful infringement." -Doc 949
It is my opinion that after all of the recent rulings, Judge Jackson will have no choice but to find willful infringement against Google, awarding Vringo with an enhanced royalty rate between 5%-7%. There are many case law examples that Jackson can draw from that support Vringo's position.
It must be noted that Judge Jackson mentioned that the royalty rate will be determined after the settlement conference is finished which happened to be the very next day (Wednesday afternoon).
So why didn't Jackson give a royalty rate along with his work-around decision? The Court wants and continues to give both parties the chance to come to an agreement on the royalty rate. Yesterday's decision gave both parties one last chance to settle things before Jackson makes his decision. To me this basically reads as Google better shape up and make a legitimate offer to Vringo or else he will increase the royalty rate if the parties cannot come to an agreement.
Now that the elephant in the room is gone (Google's work-around) we can start factoring in how much money Vringo will actually receive over the next couple of years. Below are three different scenarios that can take place with the stock over the coming days and weeks.
Scenario 1 - Vringo receives the 3.5% royalty rate.
Vringo has over $40 Million in cash and no debt. Adding it all up Vringo would have close to $722.8M in cash by 2016. If we take into consideration taxes, etc, Vringo would come out with around $361M. Divide that by Vringo's 84.12 million shares outstanding, and you get $4.29 cash per share.
|Scenario 1||Interest + Supplemental Damages||Total|
Google & Defendants
|Cash Per Share||=$4.29|
Scenario 2 - Vringo receives the 5% royalty rate.
Again, Vringo has over $40 Million in cash and no debt. Adding it all up Vringo would have close to $1.06B in cash by 2016. If we take into consideration taxes, etc, Vringo would come out with around $530M. Divide that by Vringo's 84.12 million shares outstanding, and you get $6.30 cash per share.
|Scenario 2||Interest + Supplemental Damages|
Google & Defendants
|Cash Per Share||$6.30|
Scenario 3 - Vringo receives the 7% royalty rate.
Again, Vringo has over $40 Million in cash and no debt. Adding it all up Vringo would have close to $1.36B in cash by 2016. If we take into consideration taxes, etc, Vringo would come out with around $680M. Divide that by Vringo's 84.12 million shares outstanding, and you get $8.08 cash per share.
|Scenario 3||Interest + Supplemental Damages|
Google & Defendants
|Cash Per Share||$8.08|
A big question coming up now is how much of a multiplier can we apply to Vringo? It's clear now that Vringo has shown that it can generate revenue from its patents and because of that, a multiple should be applied. You can put whatever multiple you think is right whether it be 5x, 10x, or 20x. Because this is Vringo's first big win, I'll play it safe and go with a multiplier of 2X.
For the sake of playing extra conservative, I will go with the first scenario which is a royalty rate of 3.5%. Vringo would have over $361M through 2016. Add a multiplier of two and that would give Vringo a market cap of $722M (2 x $361M). With a market cap of $722M and using Vringo's 84.12M shares outstanding, Vringo's price per share would be around $8.58. Clearly, Vringo is severely undervalued as shares closed the day at $3.81 on Wednesday.
Investors should take into consideration that I haven't even factored in the price of the other lawsuits that Vringo currently has pending, nor its patent portfolio's and other assets. Don't forget either that Microsoft will be paying 5% of whatever amount Google ends up paying up to a certain cap. Not to be outdone, Vringo is also currently seeking $118M in past damages and overturning the $30.5M it received due to an error by the courts.
Of course, instead of shelling out hundreds of millions of dollars, Google could simply scoop up Vringo and acquire all of its intellectual property and assets. Depending on what the royalty rate ends up being, my guess is that Google would have to shell out anywhere from $1.5B-$2B. That would put shares in the $15-$20 range.
Investors who get in now stand to gain huge profits in 2014 and in years to come. While the markets will most likely not repeat last year's incredible performance, investors this year need to be picky about which stocks they hold this year. Buying or holding shares of Vringo looks to be a very wise move right now as shares have the potential to be a big multibagger for investors in the years ahead.
On that note, I'll leave you with my track record and other particular stocks that I recommend.
Disclaimer: Investors are always reminded that before making any investment, you should do your own proper due diligence on any stock mentioned in this article. Have a great day and as always, I look forward to hearing your thoughts or questions that you might have.