Vringo Wins: Time To Sell?

Nov. 7.12 | About: FORM Holdings (FH)

After winning its trial November 6th against the behemoth Google (NASDAQ:GOOG) et al, Vringo (VRNG) posted a news release on its corporate website which included the following section:

"After finding that the asserted claims of the Patents were both valid and infringed by Google, the jury found that reasonable royalty damages should be based on a "running royalty", and that the running royalty rate should be 3.5%." (Vringo press release)

But the $30 million in damages were less than what Wall Street had hoped for, so the stock tanked and continues to fall today. So now what?

It's clear the traders looking for a big stock surge from the verdict immediately began selling yesterday. So much upside hype and so many wild predictions, including views that the stock would bolt to $100, made the reality of the verdict and the resulting trading disappointing to the fast money crowd. So let's step back for a moment and note that Vringo did in fact win the suit, surely contrary to the view of most short sellers, who represented 77% of the float as of October 15, 2012.

Vringo also received a running royalty as opposed to a one-time lump sum, which is viewed by most if not all as another legal victory. Vringo's future 3.5% royalty verdict (dependent upon the judge's final ruling) was also a win, because the rate could have been reduced to anything, even .5%.

Some have already estimated that a 3.5% royalty could result in over $500 million to Vringo through 2016. It's far too soon to tell, though, whether those figures might prove accurate. And there is of course the matter of Google's likely appeal. But Vringo's win obviously bodes well for other claims they will be making in the future, against firms such as ZTE (OTCPK:ZTCOF). And even a few hundred million dollars from any source/s is a huge payout for a company as small as Vringo. Plus they of course still have their Nokia (NYSE:NOK) patents and a recent influx of some $45 million in cash to continue all aspects of operations.

So is it time to sell? I contend that it is not -- it's simply too soon because we don't yet know enough. We need Steve Kim's informed and balanced insights to help us understand all the legal ramifications of the verdict. And we need time and help to understand what impact the legalities will have on future revenues, both short and long term.

Read Vringo's lengthy news release and see for yourself its complexity. Do you really think the average broker, money manager or retail investor has already fully digested the Vringo verdict and all its implications? The market is still trying to understand what the verdict actually means, and it will take some time to do that.

I think Tuesday's trading was about rash emotionalism instead of reasoned judgment. The real value of the Vringo win will come into focus over the next several days and maybe well into next week. The real impact on Vringo itself, and thus the share price, might not fully flesh itself out for 6-18 months. I don't pretend to know how all of this will play out, but my premise is that the sell-offs we saw late Tuesday and today as well were primarily about disgruntled speculators who were looking for an unrealistic grand slam from the news of the verdict. They didn't get it, obviously, so they will likely continue selling in droves and that will drive the price down as they clear out.

For the more patient (and prudent?) investor, the Vringo case is still what it is: a win. Time will tell how big the win turns out to be, and whether that has upside or downside impact on the stock. But all this short-term trading is indicative of nothing other than the short-term mindset. As cooler heads prevail and enough times passes to truly digest what all of this really means, a more accurate story will surface.

I want to make a fuller examination in the days ahead and resist the urge to do any immediate, uninformed selling. If you are like me, you have been following every aspect of this case for weeks, if not months. And hopefully you established your position long ago based upon what you could afford to lose, knowing the stock could have fallen to a buck if Vringo had lost. After all that time and contingency planning, I think a hasty departure may not be the wisest course of action given the multiple victories Vringo claimed yesterday.

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.