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Undervalued Digimarc: The Time to Rediscover It Is Now

|Includes:Digimarc Corporation (DMRC)

I posted this on my mjmaherGroup website June 3rd. I have decided to start posting to seeking alpha, so here goes. The stock has since risen 25% since my post but I think there is still upside, as you will read.

Digimarc Corporation (NASDAQ:DMRC) is based in Oregon and provides digital watermarking and content identification for all forms of media. Digimarc has an extensive portfolio of over 600 patents and 400 patents pending. The patents cover techniques for monitoring, authenticating, and managing audio, video, digital images, and other documents. The company makes its intellectual property portfolio accessible to licensees and partners .In October 2010, Digimarc partnered with Intellectual Ventures Management to expand the company’s patent licensing program. Other business partners include Adobe, AlpVision, Nielsen, and major motion picture and publishing companies. Digimarc welcomes partnerships and collaborates with partners to expand watermarking application and ecosystems.

There has been a lot of buzz around digital watermarking and their ability to optimize a users media experience while enhancing security. In April Yahoo! acquired IntoNow. IntoNow recognizes television programs by matching the fingerprints of the audio stream with the television program or commercial. Rumor has it, Yahoo! paid quite a premium for the startup. Recently DIRECTV and other cable providers have been giving consumers access to movies that are still in the theater. Digital watermarking is a key element to the security of the copywrited material.

Publishers, advertisers, and marketers can use Digimarc’s digital watermarking to embed data into their media. The Digimarc Discover Platform uses intuitive computing to read otherwise unseen watermarks in media and enhance a user’s experience.  Digimarc Discover is still in beta but has seen traction with over 800 trial users.  The trial ends June 1 and channel checks propose many revenue baring contracts for Digimarc Discover in the second half of this year.

Digimarc repurchased more than 550,000 shares in Q1 spending $15.7 million. The company maintains steady cash flow with $3.8million in net cash provided by operations. Q1 revenue came in at $9 million which is 11% lower than the same period a year ago. However in that period Digimarc realized a $4.5 million onetime contract with Arbitron. Removing that contract from the equation, Digimarc has seen year over year revenue growth of 21%, 10%, 89% and 60% for the last four quarters. Bookings have been up 19%, 18%, 77%, and 62% in the past 4Qs, this suggests a $58 million revenue next year. This should yield $1.56 in EPS vs. the current EPS of $.12.

I believe that Digimarc is under valued at $28.03. Current net tangible assets are $29 million. Revenues are estimated at $58 million. Given that most of its license revenue is  recurring in nature, a 3x multiple would be justified. This would peg the enterprise value  at $175 million giving it a market cap of $204 million or $29.75 per share. This valuation does not factor in any new revenue from Digimarc Discover which could easily become 25% of its total revenue after ten months of aggressive marketing. This would equate to a share price of $36.

This new technology is not without risk. With many competitors trying to capture the growing market, there has been some litigation between several companies including Walker Digital, Digimarc, Shazam, Apple, Nielsen, Disney, The Weather Channel, and Verance.

Things to watch in the coming quarters are the number of paid contracts using Digimarc Discover, and of course any and all litigations.

Stocks: DMRC