On Tuesday January 13, GoPro's (NASDAQ: GPRO) world was shaken when news leaked that Kodak's patent (Number 8,934,045) was reassigned to Apple (NASDAQ: AAPL), driving GoPro's stock down 12% by end of day Tuesday. Was Apple acquiring patents to take on GoPro? As the story broke, tech industry analysts reacted immediately, with most suggesting the market was over-reacting to Apple's patent acquisition. On Wednesday, January 14th, however, Devonshire Capital Funds issued a presentation that explained why a trivial matter such as a patent reassignment might rock GoPro's share price so strongly. This article discusses the importance of intellectual property licensing, especially for technology companies, and provides insight into why lack of licensing might be disastrous to the company's profits and market cap.
The presentation, entitled "An Analysis of GoPro," provides in-depth engineering analysis of the intellectual property that powers GoPro devices and rests on months of extensive research. Research began shortly after GoPro's IPO and subsequent sky-rocketing of its stock. To industry experts with decades of experience in intellectual property investments and litigation, GoPro's ballooning market cap was a surprise. Having a heavily technology-focused portfolio, with extensive experience in hardware and software startups, and years of professional work in intellectual property investments and litigation, Mr. Stack and the Devonshire team developed a conviction that GoPro was grossly overvalued. Most puzzling was the fact that as the share price kept climbing, nobody was asking questions about the rights to the IP that powers GoPro's technology.
Subsequent analysis of the GoPro patent portfolio showed that while the company holds a relatively small number of patents directly pertaining to its technology, most of its IP consists of design and mechanical patents. In fact, few of GoPro's patents pertain to the critical electronic and camera technology that underlies the company's devices, while many of GoPro's key features appear to be covered by earlier patents assigned to competitors. Shortly after dissecting the first GoPro, the fund identified 15 patents on technology that is deployed in GoPro devices and held by multi-billion dollar consumer electronics manufacturers such as Canon, Nikon, Siemens, Dell, Samsung, and Hewlett Packard. In the absence of technology licensing agreements with this group of patent holders, GoPro's potential exposure to intellectual property litigation might be well in excess of the 15% of its market cap erased by the Apple announcement.
Although we can only speculate on potential outcomes, industry experts and seasoned investors will agree that outlook is bleak. On Wednesday and Thursday, a series of lawsuits were announced, led by Contour, LLC. Contour joins eDigital, Z-Dimensional LLC, Dinkum Systems, and VStream Technologies with outstanding infringement lawsuits against GoPro. While previous lawsuits had little effect on GoPro's stock, these new lawsuits may have more teeth, and are direct evidence of the risks identified in Devonshire Capital Fund's presentation.
Despite the lack of information regarding GoPro's licensing agreements for these patents, and an increasing number of IP law suits against GoPro, analysts at large financial institutions such as JP Morgan and Wedbush Securities continue to hype up the stock and pitch it as a buy. Devonshire Capital Funds' research has identified numerous further patents held by both large and small entities which are directly applicable to GoPro's flagship products. Research on these patents is underway.
"An Analysis of GoPro" is available below and on the fund's website: devonshirecapitalfunds.com.
Disclosure: The author is short GPRO.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.