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IDCC’s current share price is undervalued

|Includes: InterDigital, Inc. (IDCC)


IDCC shares took a 14.3% haircut today on disappointed investors’ expectations after a report said bidders are offering $1 billion to $2 billion.  Recall the auction that started the recent frenzy to acquire mobile patents; the opening bid for the Nortel patent portfolio started at $900 million, and eventually was sold for a whopping $4.5 billion. Hence today’s reaction may be premature.
IDCC market value has now fallen to $2.3 billion. Given the premise that the intrinsic value of IDCC resides in its intellectual property, what then would the value be of its patent portfolio and how does it compare to its current market capitalization?
IDCC has said its intellectual property is more valuable than the patents auctioned off by Nortel Networks Corp.  Jefferies & Co.’s Peter Misek opines that the Google/MMI deal includes approximately 300 essential 3G and 4G patents, which implies each essential patent is worth approximately $20M. A paper titled “Royalty Rates and Licensing Strategies for Essential Patents on LTE (4G) Telecommunication Standards” (Les Nouvelles, September 2010) shows IDCC holding 437 declared essential patents for LTE. By applying the $20M/essential patent, pegs the IDCC valuation at approximately $8.75 billion.
There is no guarantee that IDCC's patent portfolio would achieve such a high valuation, however given IDCC’s history, the size of its portfolio and recent industry related IP transactions suggests that IDCC’s current share price is undervalued.
Disclosure: IAR is long on IDCC