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The True Value Of Vringo

|Includes:FORM Holdings Corp. (FH)

So how much are shares of Vringo (VRNG) really worth? That seems to be the billionaire dollar question many investors are asking themselves right now. Unfortunately I'm no fortuneteller, but I can tell you based on Friday's close though; it's worth exactly $3.20.

Determining the correct value of stocks in the stock market can be a difficult thing to do. Many investors look at different areas to determine what the proper value the shares should be worth. Some of these areas include; Earnings [EPS], Cash Flow, Price-Earnings Ratio [P/E], Book Value, Cash Per Share, Price Targets etc.

It's no secret that most companies shares are driven by earnings and the future guidance they give that impacts its future earnings. While this may be true for most stocks, Vringo is in a different boat. Even-though Vringo is classified as a video ringtone business, many know that they are specifically focused on protecting and profiting from their intellectual property of patents. This is why Vringo is labeled by some, as a "patent troll," as the value of the company is based more on its potential success suing over its patent portfolio rather than its business activities.

So lets go through the fundamentals and scenarios that are, and will likely take place to help show investors what kind of value, if any, Vringo has right now.

Vringo

Cash In Bank: $60 Million
Debt: None
Patent Portfolio: Vringo's Patents +$22 Million (Nokia Portfolio)
Ringtones: $266K

*Data From Vringo's 3Q Results

So just looking at Vringo on a purely cash basis without applying any earning multiples or ratio's, Vringo should be valued at no less than $1 per share.

82.26 million [Cash] / 82.2 million (Shares) = $1.00

This is ultra conservative since I didn't even add in the price of Vringo's current patents which they own. We will find out how much they are worth after the post trial motions are finalized against Google. Also Nokia receives a 35% cut in revenue that Vringo makes off its patents, so it is actually worth a lot more than $22 million.

What's Coming Vringo's Way

On November 6, 2012, the jury unanimously returned a verdict award for Vringo amounting to $30.5 million in respect to past damages by the defendants' infringements commencing from September 15, 2011. It was also confirmed that Vringo would also be compensated by Google (NASDAQ:GOOG), with a running royalty rate of 3.5% through 2016.

How They Came Up With These Numbers

Company Past Damages Multiplier Total Jury Awarded
Google $451,000,000 x 3.5% $15,785,000 $15,800,000
AOL $22,700,000 x 35% $7,945,000 $7,943,000
IACI $18,900,000 x 35% $6,615,000 $6,650,000
Target 282,000 x 35% $98,700 $98,833
Gannett 12,000 x 35% $4,200 $4,322
      Total = $30.5 Million

What Could Be Changed

Vringo, I/P Engine presented evidence at trial that showed the appropriate way to determine the incremental royalty base attributable to Google's infringement was to calculate 20.9% of Google's U.S. AdWords revenue, then apply a 3.5% running royalty rate to that base.

Now that we are in the post motions stage of the trial, Vringo has once again provided its stance on the past damages figures (Rule 59). This is a motion for a new trial on the dollar amount of past damages. Vringo is seeking $118 million in past damages that accrued since September 15, 2011.

How The Scenario's Could Play Out For Vringo

Scenario 1) Nothing changes. Vringo receives the 2.9% in past damages from the defendants and a 3.5% royalty rate through 2016 from Google. So how much in royalty payments will that be? Going off of Google's past growth rates, Google could see total ad revenues climb upwards of $194 billion through 2016. These numbers add up to $635 million in royalties in which Vringo would receive over the next four years. On a per quarter basis that would come out to roughly $40 million per quarter.

 

Past Damages

$30.5 Million

Royalties (3.5%) Total
Google $15,800,000+ +635,000,000 =$665,500,000
Other Defendants $14,700,000+    

Vringo has $60 Million in cash with no debt. Add in the $665.5 million it will receive from the defendants & Google's royalties and that adds up to over $725.5 million dollars by 2016. Divide Vringo's 82.2 million shares (common stock) and you get $8.82 cash per share.

Scenario 2) Vringo receives the 3.5% royalty rate as well as the 20.9% it sought in past damages from Google.

 

Past Damages

($118 Million)

Royalties
(3.5%)
Total
Google $103,300,000+ +635,000,000 =$753,000,000
Other Defendants $14,700,000+    

Again, Vringo has $60 Million in cash with no debt. Add in the $753 million it will receive from the defendants & Google's royalties and that adds up to over $813 million by 2016. Divide Vringo's 82.2 million shares (common stock) and you get $9.89 cash per share.

Scenario 3) Vringo receives the 5% royalty rate and 20.9% past damages from Google.

  Past Damages

($118 Million)

Royalties
(5%)
Total
Google $103,300,000+ +970,000,000 =1.09 Billion
Other Defendants $14,700,000+    

Again, Vringo has $60 Million in cash with no debt. Add in the $1.09 billion it will receive from the defendants + Google's royalties and that adds up to over $1.15 billion by 2016. Divide Vringo's 82.2 million shares (common stock) and you get $13.99 cash per share.

Scenario 4) Vringo receives the 7% royalty rate and 20.9% past damages from Google.

  Past Damages

($118 Million)

Royalties
(7%)
Total
Google $103,300,000+ +1,350,000,000 =1.47 Billion
Other Defendants $14,700,000+    

Again, Vringo has $60 Million in cash with no debt. Add in the $1.47 billion it will receive from the defendants + Google's royalties and that adds up to over $1.53 billion by 2016. Divide Vringo's 82.2 million shares (common stock) and you get $18.61 cash per share.

Vringo's New Earnings Multiple

A big question coming up now is how much of a multiplier can we apply to Vringo? It's clear now that once post trial motions are finalized, Vringo, proving that its patents can generate revenue,should be multiplied by some kind of a factor. You can put whatever factor you think is right whether it be 5x, 10x, or 20x. Let's go with a multiplier of 5x.

Lets say that the post trial motions go in the direction of scenario 2. This would mean that Vringo receives the 3.5% royalty rate as well as the $118 million in past damages from Google and defendants.

Vringo would have over $753 million through 2016. Add the $60 million in cash with a multiplier of 5x and that would give Vringo a market cap of $4.06 billion (5x $813 million). With a market cap of $4.06 billion and using Vringo's 82.2 million shares (common stock), Vringo's price per share would be between $49-$50.

What Happens If Google Appeals?

Google has the right to appeal the case no doubt about it. However, if Google decides to go down that route, then Google might have another problem on its hands. Vringo then would be able to appeal the laches decision (which limited the past damages Vringo could receive). Does Google decide to go down this route? Unfortunately only Google knows that answer.

On the other hand if Google appeals and wins the case they would avoid having to pay Vringo past damages and royalty fees. Remember Google has deep pockets ($48 billion in cash) so they could have already easily settled with Vringo for a couple hundred million. Because they didn't choose to do so, Google seems to be sending the message that it will not stand idly by and settle with whoever wants to sue them.

Could Google Work Around The Patents?

Yes, this would be a major blow to Vringo. The patents that Google currently uses from Vringo is bringing Google billions of dollars of ad revenue. If Google works around them then Vringo would miss out on hundreds of million of dollars in royalty fees. However, why would Google go through such a big process just to save a couple million bucks when they're already making billions of dollars off the patents? Also, If it was so easy to work around the patents then why hasn't Google already done so? This is why it doesn't make sense in my opinion that Google would do something like this. However, weirder things have happened in this case so investors shouldn't be surprised if something like this does happen.

Conclusion

Post trial motions are still underway to determine the final outcome of Vringo (David) vs. Google (Goliath). The scenarios mentioned above are real possibilities and depending on how the final post trial motions go, Vringo could have cash per share in the range of $1.00 - $19.00.

Remember though, the jury unanimously ruled in favor of Vringo. It is highly unlikely that the judge would go against that. With the stock closing at $3.20 Friday, I feel Vringo is trading extremely low at this point and not reflecting its current and future worth. Plus I haven't even added in the value of the 500 patents (which is really more than $22 million) that Vringo acquired from Nokia.

Vringo still has pending suits against Microsoft (NASDAQ:MSFT) and ZTE Corp. Vringo stated on Thursday in its ZTE case, "In absence of an agreed settlement, a trial on the first asserted patent is scheduled on September 24, 2013."

Investors are reminded that this article should be considered general information and to make sure they do their own proper due diligence with regard to the stocks mentioned in this article. Have a great trading day and I look forward to all of your helpful comments and insight.

Disclosure: I am long VRNG.

Stocks: FH