What's Going On with Vringo?
Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Vringo (NASDAQ: VRNG) was incorporated in January 2006 in the state of Delaware. The company was formed to take advantage of the growing popularity of smart phones. To do this, Vringo developed four mobile video application platforms: Facetones, Vringo Video Ringtones, Remix Fan and Fan Loyalty. The company's core concept was initially designed to provide mobile users an additional option of integration with social networking; that’s why it has profited from the rising popularity of social networks such as Facebook and video sharing websites like YouTube. In July 2012, Vringo merged with Innovate/Protect, Inc. (I/P). The merger indicated an effort to expand the business beyond being a key source of software platforms for mobile video and social applications. Interestingly, the merger proved to be a huge catalyst that pushed Vringo onto the intellectual property scene.
Vringo is involved in a number of lawsuits against large tech companies, such as AOL (NYSE: AOL), and IAC/InterActive (NASDAQ: IACI). Although the company has reached a partial settlement agreement with AOL, other lawsuits still stand, including litigation against retailer Target (NYSE: TGT). Vringo has recently filed another patent infringement suit against the British subsidiary of Chinese telecom giant ZTE. However, the biggest company Vringo is suing is Google (NASDAQ: GOOG).
The lawsuit involving Google is about two patents I/P bought from Lycos, one of the biggest search engines of the 90's. Lycos, along with several others, were completely eliminated after Google introduced its own search engine. Thus, this lawsuit could be targeting the very foundation of Google's business model. The judge overseeing the case has recently refused to end the case in Google's favor, a decision that has created widespread expectation of another settlement between Google and Vringo.
Google has generated about $146 billion in revenues since 2005. About 96%, or $140.16 billion, of the sum comes from the company’s advertisement revenues. As per the original complaint, the Vringo is looking for compensatory damages for the full period of infringement. The period would start from Sept. 15, 2005, and extend through the expiration of the two patents in 2016. However, the lawsuit covers only domestic activity, from which Google collects a little less than 50% of its overall advertising revenues.
Assuming that domestic ad revenues are 49% of Google’s total advertising revenue, that will put the eligible revenue for royalty at about $68.68 billion. Vringo is looking to get $696 million for the past revenues and a further $700 million in future royalties. In case of a favorable outcome, the company will be able to get a substantial amount cash. In its original filing, I/P stated that its patented technology was known to Google in part from prior litigation. Due to the knowledge of the existence of patents, there is a possibility that Google could be found guilty of willful infringement.
How should the stock be valued?
In the case of Vringo, fundamental and technical analysis does not help much. In the most recent quarter, the company reported revenue of $100,000 and a loss of over $5 million. The stock has mainly been riding on investor sentiment and the hope of receiving substantial cash settlement from the lawsuits. The only metric suitable for Vringo at present seems the cash per share, due to the expected cash settlements. If the firm is able to get, let's say, between 50% of the sum it is asking for, it will put the cash settlement at about $700 million. Note that this is the best case scenario. In the worst case scenario, the company will receive nothing, and that is also a possibility as well.
At the moment, Google is in a tough spot. The company realizes that if it settles with Vringo, it will open the door for other patent cases. As a result, another possible way for Google to save face is to simply buy Vringo and add the patents to its own treasure trove. However, Vringo’s stock has been jumping up since the start of the year, and different sources value it between $300 million and $500 million. Even with this growth, acquiring the company can still be a cheaper option for Google than settling. However, Vringo’s management will want to get a significant premium above the current value.
The recent lawsuit against ZTE is interesting. It shows that the company is optimistic about its chances of multiple settlements. As a result, a bidding war could ensue, and Vringo will surely benefit from that scenario. I believe the firm will want to get premium above present cash per share figures, and the takeover can happen anywhere between $15 and $20.
Vringo is evidently hopeful that it can win in court against the industry giants, or that many of these giants will settle and pay hefty licensing fees. At the moment, the stock is a dream for traders and without a doubt has brought handsome returns. However, the long-term investors have stayed away from the stock due to the elevated levels of volatility. Betting on legal outcomes is a risky proposition, but traders are excited about the company's prospects. At the moment, the future looks bright for Vringo. Cash settlement or acquisition, whatever the outcome, Vringo shareholders are likely to be the winners.
ecofinstat has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.