Netlist Is More Than A Lawsuit

Summary

• Netlist revenue grew 236.9% Y/Y.
• Netlist is in the midst of what may be the largest patent infringement lawsuit in history.
• Netlist continues to establish itself as more than a lawsuit.

blackdovfx/E+ via Getty Images

Introduction

I give a Strong Buy rating to Netlist (OTCQB:NLST) because of its potential to create history. Very few opportunities like Netlist present themselves to the average citizen in a lifetime. Because Netlist is a small company that is traded OTC (AKA Penny Stock), many investors and institutions will not touch it, allowing investors to invest in a much more favorable investment.

Netlist is a technology company based in Irvine, California, that primarily produces SSD and memory technology. The company has a broad patent portfolio and has multiple lawsuits over its patents and their usage. The potential windfall of these cases is in the billions of dollars and, when concluded, would more than double the current market capitalization overnight.

Financials

As of the last SEC filing, Netlist has cash, cash equivalents, restricted cash of $58.3M, and total debt of $5.1 million. While funding the expensive lawsuits necessary to bring the many infringers to tax, the company currently loses about $5.8 million per quarter (a number that is shrinking as the company grows), resulting in GAAP EPS of -0.03. Netlist has a total share count of roughly 230 million shares outstanding.

Performance

Briefly touching on the performance of the stock.

Data by YCharts

The company was quickly approaching being bankrupt in 2020 until a patent validation saved its share price. Since then, multiple catalysts have occurred around the company's patent litigation which has continued to propel the stock higher and higher while resetting the stock's floor. The stock trades atypical to the market because it mainly moves on news from its court cases. I, however, think this overlooks the solid underlying business. Netlist is a rapidly growing tech company outside of its litigation.

Earnings

On May 2nd, 2022, Netlist had its quarterly earnings call, and it went fantastic. The highlight is the revenue of $50.2 million which represents 236.9% Y/Y growth. Q4 of 2021 was a solid financial quarter, and we see that Q1 of 2022 continues this trend. For this reason, I would expect the company's revenue to continue to multiply. Additionally, suppose the company settles some of its lawsuits. In that case, they will most likely end with some sort of licensing deal for Netlist technology which will continue to help its revenue snowball.

Litigation

I will summarize the ongoing litigation below shortly, but I will link my previous articles and interviews on Netlist for more information. Most recently, I wrote an article on Netlists promising case against Google(GOOG)(GOOGL). Before that, I wrote a summary of what happened in the Samsung (OTCPK:SSNLF) case from a few months ago and an overview of the Google case. I also did an interview on YouTube after the Samsung case. The piece I wrote the last time the Google court case was pushed back. I did another interview on YouTube on the voided contract from Samsung. My original outlook on the Samsung case and the void of contract that created it. I did a broad interview on YouTube about the company. My original broad summary of Netlist's litigation.

To summarize the litigation, Netlist is in litigation primarily with three companies: Micron, Google, and Samsung. All of these lawsuits are big, and winning any of them will set the company in a great financial position moving forward that would inject the company with cash and give them ongoing revenue from a licensing deal; however, the Lawsuit against Google, I believe has the potential to be the largest patent infringement lawsuit in history which would mean it would be over $2 Billion. At the very least, I think that the combination of the company's lawsuits could result in the largest patent infringement lawsuit in history.

No significant updates have happened in any of the company's cases since my last article, and I will be sure to write an article upon any significant news dropping.

Risks

Netlist faces two main risks outside of general market risks. The first is that the company fails to win its lawsuits. This is a genuine possibility and would result in a major short-term reaction to the stock price. However, as mentioned in this article, the company is a rapidly growing tech company outside of its lawsuits which I believe will allow it to bounce back from any loss in value. The second issue is that the technology side of the company has a tiny market share in a very competitive field. While a small market share means there is a lot of room for growth, it also means the company is in an easier position to be pushed around (as alleged in its lawsuits).

Conclusion

The whole market dropping has led to many great buying opportunities and has caused many investors to be less excited about investing in a higher-risk company like Netlist. However, even with the deals across the stock market, I still believe that Netlist is an excellent buy. The company is a rapidly growing tech company that is in the midst of what may be the most significant patent infringement lawsuit in history. While the journey is never smooth, I think next year will be fascinating for all Netlist shareholders.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NLST either through stock ownership, options, or other derivatives. 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.

Comments

[Jacob Braun]

Check out my new YouTube channel
www.youtube.com/...

[pipster]

@Jacob Braun so basically you wrote this to plug your youtube channel, because you probably are making more there off the ad's then you will off the falling knife known as netlist.

i will point out it was the CEO who stated that sk hynix settlement and samsung's investment that already set the RAND rates for anyone IF they are proven to be infringing. using this model we come to around 100M for samsung, and roughly 20M for micron. google will never owe a single cent as they never produced any goods they bought them all from places like smart, sk hynix, samsung, and micron.

can you show how you come up with "billions" when rand rates have already been set?

[josephzinser]

@pipster this didn't age well. Netlist won claim 16. Leave Jacob alone pipster. He does yeoman's work! I'm willing to bet his stock picks are 100times better than yours!

You obviously didn't pay attention to what the judge magistrate spero said after the discovery hearing early on in the case. Judge spero specifically stated that sales and profits are part and parcel to intervening rights. In other words everything that Google has benefited from regarding this patent will be taken into account and a price will be paid to Netlist. Google needs to open their books back all the way to 2014 for ddr4 which is what claim 16 reads on.

[candaul]

Can Google appeal this decision or are we at a "damage estimation" stage?

[RunDog]

@candaul No appeal can be taken until the case is final, with a judgment entered by the trial court. They probably are at the trial stage or close to it, where all issues -- validity, infringement, damages -- will be tried to a jury. I have not seen anything that suggests Google is precluded from challenging Netlist on any of these issues, except intervening rights. Google can even still challenge validity. Any challenge based on the same grounds considered on reexamination of the patent by the Patent Office may be a non-starter with the jury, but in general there are many other patent defenses that Google potentially could assert. These cases are complicated. It is impossible to predict who may come out on top without a detailed study of the case, and even then it's a crapshoot.

[bargains]

@RunDog
Do you have a legal background/expertise bearing on these kinds of cases?

[josephzinser]

@candaul that is called an interlocutory appeal and you typically cannot appeal a partial summary judgment. During a case. They can always appeal after the case is finished. Netlist had a partial summary judgment Google had a summary judgment. I do believe that you can appeal a summary judgment if it's case dispositive but this one is not. That is the research that I've done previously.

[Ronn Dewu]

Netlist's Gail Sasaki said:
"As a reminder, we do not formally guide, but given the uncertainties within the supply chain that Chuck noted earlier, we currently expect Q2 '22 product revenue to be similar to Q1 '22, although we are targeting moderate growth."

What I read from this is, that they don't await too much increase in revenue. How does this relate your prediction of rapid growth?

[50 Cent007]

Jake: I agree with almost everything except the risk. Samsung- The court found Sammy breached the contract and therefore continues to use the Netlist IP w/o authority therefore we have $$$ coming no matter what. 2nd re Google- it is not whether Netlist gets royalties but how far back. The worst scenario is 2 years, the best more than 10 years (we are talking billions). The patent does not expire until 1/26 so add future compensation to the mix. Re Micron- we are on a fast track and it appears Micron wants to discuss settlement but Netlist is awaiting claim construction in court scheduled for this month. In sum, I do not see a great deal of risk especially at $4 share. Seems like no brainer applying a risk benefit analysis. Long term investors just need to be patient.

[seanmccluskey]

@50 Cent007 your bang on.

[josephzinser]

I have been a Netlist investor for several years now and the company just continues to grow and they continue to win. As far as the Google case goes the ruling on the judgments associated with the intervening rights hearing that is the subject of the current litigation could come any day now. It has been 2 months as of today and typically the judges will issue a ruling within 90 days. I think it's important to note that Google is asking for absolute intervening rights. I personally think Google will lose their arguments based on my knowledge of the case but even if Google wins some of their intervening rights arguments, Netlist still gets paid.

Intervening rights would only mean that Google has to pay for a couple years instead of a decade or more but this would still be a very large number and they would need to license going forward. There is no bad outcome here. It's only a win-win situation.

[bargains]

@josephzinser
Are you keeping track of the new developments with Claim 16 which Netlist has apparently won?

[josephzinser]

@bargains I am Boliver Shagnasty on stocktwits and GoogleStoleOurPatent on Yahoo message board and Hedge Apple Joe on Reddit. Thanks for the heads up but yes I'm aware. I post a lot of court documents.

[bargains]

@josephzinser
I hope you will get a chance to comment on RunDog's comment above from today, 2022-5-8. He seems to think that Google might have multiple avenues to challenge the Netlist case and drag this thing out for a long period of time. My impression, for whatever it is worth, is that Google might want to put this whole ugly issue (of their creation) to bed and move on.