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Document Security Systems Patent Case Against Apple Looks Promising

|Includes:Apple Inc. (AAPL), DSS, VHC

In a press release released last month, Document Security Systems Inc. (NYSEMKT: DSS) reported that its subsidiary, DSS Technology Management, has filed a patent infringement case against Apple, Inc. (NASDAQ: AAPL) in the United States District Court for the Eastern District of Texas, Tyler Division. The complaint is related to the use of wireless peripheral patents, namely the United States Patents 6,128,290 (the "290 Patent") and 5,699,357 (the "357 Patent). Both patents are called "The Personal Data Network". DSS Technology Management acquired these patents during the third quarter of this year in an effort to boost its patent portfolio. These patents support research and development efforts that will develop peripheral devices that run AuthentiSuite, its digital brand protection platform. The suit against Apple identifies the use of the patents in a wide range of different product lines, which includes Mac Pro, Mac Mini, iMac, iPhone, iPad, and iPad Touch.

It seems that DSS Technology Management has a fair chance of winning the suit and could be similar to the case of VirnetX Holding Corp. (NYSE: VHC) after a federal jury decided to order Apple to pay VHC $368.2 million for infringing patents for virtual private network technology. As a result, VHC's stock rose more than 20 percent during that day, its biggest one day jump in three years.

DSS Is a Viable Business

Investors would be ill advised to bet on DSS shares for winning this patent infringement case alone. Although winning the suit against Apple will provide solid capital gains for investors, the process will take time and cost the company hefty litigation fees. However, DSS looks like a good company with stable revenues on a stand-alone basis. Revenues for the first nine-months of the year increased by 5 percent to $12.3 , primarily due to an increase in technology sales, services, and licensing revenues. It reported a net income of $3.4 million for the period, or equivalent to $0.12 earnings per share.

Analysts are projecting sales of $24 million in fiscal year 2014, or a growth of around 18 percent over the coming year. Moving forward, management is counting on investments in digital counterfeiting solutions and intellectual property given the high-return potential of these niche markets. Moreover, its merger with Lexington Technology Group has increased its patent portfolio and will provide the company with better access to capital and strong management team.

On a per-share basis, both VHC and DSS earns around $0.14. Despite this, there is a big discrepancy between their market capitalizations. In fact, VHC has market capitalization of around $900 million, 10 times bigger than DSS's market capitalization of $90 million.

Earlier this year, research firm Dawson James initiated coverage on the stock with a buy rating and a price target of $4 per share. This implies an upside of more than 100 percent. There are many catalysts going for this stock. It will only be a matter of time before these catalysts will unlock the real value of its shares.

Stocks: AAPL, DSS, VHC