Shortly after launching the Patent Stock Review, which aggregates the news on 11 select patent plays, we were inundated with requests for what would be the next "big" mover in the patent play monetization arena.
While we couldn't come up with a short-list of "who's next" favorites, we do believe we have identified three companies, which we feel have distinct degrees of attractiveness for varying holding periods, that being long-term, intermediate-term and short-term.
The primary influencing factors included recent price performance, upcoming potential developments, a model of business sustainability and to a lesser but measurable degree, the fact that last Saturday marked a historic day in the patent world, as new provisions of the America Invents Act (NYSEARCA:AIA) took effect. Without going into great detail, the act now dictates that invention priority in the U.S. will now be determined based upon the "first to file" a patent application, as it is in most of the rest of the world, as opposed to the "first to invent" standard that previously applied.
For the long-term, we believe Acacia Research has the most appeal.
Recent price performance:
Upcoming Business Developments: Despite being one of the best performing financial related stocks since the market bottom in 2009 (and since 2003 for that matter), Acacia's most significant upcoming development isn't a single event, but rather a significant modification in their business model. This change given time, we believe will be embraced by investors, as Acacia will looked less like a publicly traded patent litigator and more like a super-charged patent merchant banker. Specifically in 2012, Acacia flexed it's capital structure muscle by investing $328 million versus $14 million in 2011 and $8 million in 2010. In short, confident in its abilities at patent assertion, Acacia decided it doesn't merely want a piece of the action, it wants all of the action and is willing to put up the money upfront, to garner the majority or even entire potential infringement and/or future licensing revenue stream. It is a supreme show of confidence and if past history is of any indication of future performance, a warranted bet.
Business Sustainability: Again if past performance is any indication, Acacia rules supreme in its ability to sustain. A number, if not the majority of the companies we follow, have two to three patents which they believe are enforceable. Even with success, this leaves a potential air-pocket with regards to future valuation. It can be akin to owning a mutual fund with just one stock in its portfolio. If they are right, and the one portfolio holding gains five-fold, what happens when they sell. What premium above cash can be assigned? If a patent play company were to win $100 million for past infringement and a fully played out annual revenue stream of $10 million what would that be worth. Cash is cash, so theoretically, that's worth $100 million. But what type of multiple can be placed on the $10 million? In Acacia's case, with its proven track record of having an infrastructure to reinvest the $100 million, the premium can be significant.
AIA: The word we receive from industry experts is that speed cameras are being installed on all streets surrounding the USPTO, to deter inventors from exceeding the local speed limit, as they race to file their patent applications. We believe this will greatly benefit all players or service providers (publicly traded or not) for the next two to three years. With Acacia being widely known, it should be a natural beneficiary. So looking three to five years out, Acacia has (assuming continued good operating performance) a potential double barreled effect of benefiting from a greater lion share of the deals it participates in and more deals.
When we first began following VirnetX in September of 2010, the shares we trading at $6.50.
Recent Price Performance: Surprisingly enough, post-verdict that summer and fall, shares of VirnetX traded from a high of $7.99 to a low of $4.80 or for better perspective, the equivalent of dropping from $79 to $48. Hindsight being 20/20, it is rather obvious that short term trading forces can ignore fundamental forces. That fall we believe the influence was that investors "paid for a win" and when they got the win and the shares didn't hold the gains, everyone headed for the door. Short-term investors moved to their next event stock and long-term investors began to believe something was wrong. We believe VirnetX's recent plunge is near identical, in investor psychological confusion.
Upcoming Business Developments: The company is now very far along the "proving the validity" of patents events, which attracts short-term investors and is now headed full steam towards the "proving the licensing stream" case. While we're sure the Company prefers not to lose its appeal with the short-term trading community, the long-term investor community is a massively larger capital pool. They are also less fickle. What makes VirnetX so attractive from an intermediate standpoint, is the recent selloff, combined with the expectation of potential licensing fees related to initial large scale deployment from 4G/LTE shipments of equipment beginning in the 2nd half of 2013. So in that light, for new positions, the sell-off couldn't have happened at a better time. As the year progresses, better visibility of the adoption of 4G/LTE could attract growth stock investors creating a premium valuation in the market. This will also address business sustainability questions. Finally, AIA has no significant bearance on VirnetX's valuation.
For the short-term, we believe that CopyTele has the most significant appeal. Originally taken public in 1983 by Gilford Securities at $10 per share, for all intents and purposes, CopyTele began life in September of 2012.
Recent Price Performance: CopyTele is the latest publicly traded company to change its business model from technology development, to patent assertion, is starting to garner attention since the arrival of new management. Although CopyTele's stock price has remained relatively constant, average daily trading volumes have increased dramatically over the past 2 weeks, as new investors look at the untapped potential of CopyTele's patent portfolios and new management's track record with monetizing patents.
Upcoming Business Developments: In September of 2012, the Company announced that Robert Berman, who started Acacia's (see above) patent assertion business in 2003 and as COO and General Counsel, had responsibility for managing all patent monetization activities and related personnel joined CopyTele. He brought along with him John Roop as Senior Vice President of Engineering; and Dr. Amit Kumar as strategic advisor. Roop, was at Acacia from 2001-2008, and was Senior Vice President of Engineering, where he built and managed the technical group responsible for the evaluation and monetization of patents for acquisition and licensing. Kumar was a member of the Board of Directors of Acacia from 2002-2008.
In January of 2013, they announced the filing of lawsuits alleging theft of display technologies used for Amazon's Kindle, Barnes & Nobles Nook, and Other Electronic Devices. IPWatchDog stated "CopyTele is seeking punitive, treble and exemplary damages of more than $700 million from Taiwan digital display manufacturer AU Optronics Corp. (NYSE:AUO), for stealing patented technology with the intent to aid the monopolization of the digital display market."
What excites us most about the upcoming events is the firm they selected to represent their interests, Lieff Cabraser. Lieff earlier tangled with AU Optronics and to date has wrestled court approved settlements of over $450 million from them, in a price fixing case. So they have "prior work experience" with AUO. Equally interesting is Eric Fastiff, who is the head of Lieff's Antitrust and Intellectual Property Practice Group and who additionally played a key role in negotiating and finalizing a $295 million settlement from DeBeer's, will be handling the case.
Business Sustainability: Robert Berman and his team have over 30 years of combined experience in Patent Monetization and Patent Assertion, and has generated in excess of $150 million in patent licensing revenues. They came to CopyTele to first monetize its internal existing patent portfolio built over the years, which include 53 U.S. Patents and 11 U.S. Patent applications with coverage primarily in four technology areas: Key Based Encryption; ePaper® Electrophoretic Display, Nano Field Emission Display, and Micro Electro Mechanical Systems Display. The team next plans to acquire additional patents and patent assertion rights from third parties, much like Acacia, which is only natural considering they were the ones who started it.
AIA: As we mentioned earlier, all service providers will benefit by the American Invents Act. CopyTele could additionally and greatly benefit with a favorable progression of events in its case, which will certainly be high profile in the main stream media. When CopyTele announced its suit against AUO and E-Ink, we read articles with headlines like "Can a Patent Suit Take Kindle off the Market" and "Amazon May Have to take Kindle off Market." A favorable outcome provided by Lieff Cabraser would in our opinion no doubt lead to numerous David vs. Goliath type media articles with CopyTele and its current $40 million market valuation against Taiwan based AOU which had sales near $14 billion and attract inventors seeking patent assertion help.
Disclosure: I am long COPY.OB.
Business relationship disclosure: I have not been compensated to write this article but my firm has been compensated to provide investor relations services to publicly traded companies including CopyTele. Any reports written on behalf of the publicly traded companies will be clearly disclosed within such reports.
Additional disclosure: Past performance of other companies mentioned in Institutional Analyst's various newsletters or otherwise mentioned in its research reports or newsletters is no indication of future performance of any current or future companies mentioned.
Disclosure: I am long COPY.OB.
Additional disclosure: Business relationship disclosure: I have not been compensated to write this article but my firm has been compensated to provide investor relations services to publicly traded companies including CopyTele. Any reports written on behalf of the publicly traded companies will be clearly disclosed within such reports.Past performance of other companies mentioned in Institutional Analyst’s various newsletters or otherwise mentioned in its research reports or newsletters is no indication of future performance of any current or future companies mentioned.