In our last update on Vringo (VRNG), we discussed its unreasonable valuations and high risk for investors. The article got a lot of criticism from Vringo bulls. Since then, the stock has fallen more than 20%. In that update we were of the view that there was a good chance of Vringo winning the case against Google (GOOG), but calculations suggested that the victory was already more than priced into the stock. The final judgment on Vringo's first major litigation was announced yesterday. The verdict is only marginally better than a loss for Vringo investors. The jury gave the following verdict:
- I/P Engine had proven by a preponderance of the evidence that the defendants infringed the asserted claims of the patents.
- Defendants had not proven by clear and convincing evidence that the asserted claims of the patents are invalid by anticipation.
Vringo was seeking a minimum settlement of $696 million, but the verdict gave it a mere $30 million; less than 5% of its minimum target. According to the jury, reasonable royalty damage should be based on a "running royalty," and the royalty rate has been set at 3.5%. The onetime payment of $30 million should cover Vringo for all past infringements. This amount is divided among the defendants as follows:
The payout (per share) from the trial has been calculated below. We are assuming that the company has a required rate of return of 14%, and has 76 million outstanding shares. This analysis yields a payout per share amount of $3.86. However, Google is expected to challenge the decision, and one should use a higher discount rate as the expected cash flow has a high amount of uncertainty attached to it. If we increase the discount rate from 14% to 28%, in order to account for this uncertainty, the payout comes down to $2.6 per share.
No of Shares
Payout Per Share
*This rate has been calculated using a market risk premium of 6% beta of 2.2 and a risk-free rate of 1.7%. Required return on equity = risk free rate + beta*(market risk premium).
This victory has confirmed the legitimacy of the claims made by Vringo, but it has also created uncertainty about the value of its patent portfolio. Vringo has classified its own patent portfolio into three segments: Internet Search, Telecom Structure, and Mobile. The original patent portfolio that Vringo inherited from its merger with I/P was based on Lycos' patents.
Recently, the company has acquired more patents. A major development in this regard was Nokia (NOK) agreeing to sell 500 patents and patent applications to Vringo. Despite this patent portfolio diversification, Lycos' patents and its litigation against Google and others were Vringo's best bet, and the results have not been what the company was expecting. After this decision, the ability of Vringo to capitalize on the rest of its patent portfolio should be a key concern for investors.
The company has failed to live up to its settlement expectations. The stock is priced correctly at $3.6. We believe that if Google challenges the decision, the stock will likely slump further. Therefore, it is a very good time for investors to take profits.