A thorough patent strategy can separate innovation risk from business risk, as mentioned in Part 1.
The important question is are there listed companies that exhibit similar characteristics as AOL (AOL) and Motorola (MMI)? To find out, it's important to look at key characteristics that made their patent portfolios valuable:
- Lots of patents - While with patents it's about quality, not quantity, number of patents does increase the probability that good ones exist.
- Early industry pioneers - If a company was at the forefront of a growing industry, it is likely many other companies have built on its protected innovation.
- Beat up stock prices - The stock price has been in decline because growth investors are gone and value investors fear it. Specifically, a stock without a convenient investor habitat. In this situation, I believe the divergence of the market value of IP and the market value of the company gets exaggerated.
- Knowledge of IP's value - Companies that are ramping up patent application efforts typically know that patents are undervalued in the market for that industry. Companies showing willingness to use their patents for more than just defensive purposes probably know the value of their IP.
3 Possibilities of Undervalued Patent Portfolios
Research In Motion (RIMM)
A few years ago everyone had a BlackBerry. Today it's sort of like owning a VCR. Research in Motion has been counted out by the market for the last few years (maybe unfairly.) The BlackBerry maker trades around 6X earnings. While long term prospects seem bleak given the competitive handset market, don't completely count out the innovative phone marker. Cash flow from products still exist as detailed by this great article.
A September Forbes article mentioned RIM's patents to be worth only $2.5 billion. This number was lower than some of the rumors on Wall Street. Since this article, the market for mobile patents has continued to get more intense. While recently doing business with a patent broker, I started to ask about handset patents and patents related to mobile phones. The guy gives a small chuckle and says "Hey, mobile phone patents are so valuable right now, you don't have the resource to even begin bargaining."
RIM has been stepping up its on creating its patent portfolio exactly as the market has gotten hotter. Intellectual Property Owners (IPO) has now recognized them as a top patent creator. From 2006-2011 we have seen new patents growing at a CAGR of 61%.
Number of Patents
RIM is ramping up its portfolio and now is 24th on the total patents list with close to 2500 patents. This is higher than any handset maker. It could be patenting all its innovation hoping for an AOL- or Motorola-type IP sell.
Affymetrix was legendary for being a cornerstone in the development of R&D tools used by biotech companies in Northern California. Affymetrix has some of intellectual property in which an industry was built. Now it's been left in the dust by its competitors. It trades for less than it went public for in 1996, and a tiny fraction of the value it had back in the biotech bubble. Its not growing, nor is it profitable from an earnings standpoint.
Currently it has 423 patents in its portfolio according to patent genius. It's shown a willingness to use patents offensively in the past. It sued Pacific Biosciences (PACB) right before its IPO, and it extracted a settlement from Illumnia (ILMN) back in 2008 for $90 million. The gene tool industry is growing rapidly, despite the slowdown in government and academic spending during the crisis.
It uses a consumables business model which means cash flow might still come, even if its business fails to move next generation platforms to the market forefront. It has no debt and cash of $120 million. With a market cap of only $350 million, this company could have an overlooked patent portfolio.
Yahoo also isn't a "loser," per se. Even last year it was rank by Google as the 3rd most visited site. The return on investment for the millions of eyeballs on ads has failed to live up to expectations of the past. It's also still a frequently used search engine, but Google absolutely controls that market. Yahoo's stock has never really gotten out of the funk after it declined the Microsoft takeover offer.
Yahoo has been increasing its patent war chest in an industry with rampant infringement claims. With Google and Facebook stepping up their respective patent buying efforts, the patent market in Yahoo's space is going through the roof. Facebook recently acquired $550 million worth of patents from Microsoft. Microsoft acquired those patents in a block which had a per patent price of $960,000. Many patent blocks have per patent prices around the million-dollar mark in the internet space.
It ranks 49th in the total patents list with 1,464. Not only is it upping its war chest, but it's also shown its willingness to use the legal system in an industry where do so is sometimes regarded as "trolling."
Yahoo has been in the internet space since the beginning, we know it has important IP. Its well aware of the value of its IP given its continued use of the court system and patent portfolio building efforts. It could be positioning itself to be acquired for its intellectual property.
Take Away Point
Yahoo, RIM, and Affymetrix all have large patent portfolios, have protected IP in a growing space, have depressed stock prices, and have knowledge of the value of their IP portfolios. These are prime examples of companies that could have profitable options the market has not taken into account.
In this article I am neither advocating a get rich quick scheme by buying stocks that will have their patents acquired, nor am I suggesting these companies should sue arbitrarily. This article is simply pointing out the belief that equity prices have not caught up to the patent market. It's also pointing out that early innovators have the potential to seek out alternative profitable options if later innovators have built on their technology. Many times we forget that business risk and innovation are two separate things that can only be separated successfully through a patent strategy.
Disclosure: I am long ILMN.