Google Plans to Break This Tiny Tech Company
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Google (NASDAQ: GOOG) and Vringo (NASDAQ: VRNG) are still at trial over whether Google has infringed upon one of Vringo’s patents. The premise of the Google lawsuit includes a patent that was filed by one of the earliest and biggest search engines, Lycos. It also appears that insiders were a bit wary about whether Vringo could pull off the upset, as a number of insiders dumped shares above the $4 per share mark before the end of October.
Vringo has seen its shares pushed down by more than 25% over the past week after eclipsing $4.50 per share on the hopes that the company could pull off the patent lawsuit win against Google, and score some big money in the process. Earlier this week, the company's shares took a hit on the news that the judge was going to only award damages, should Vringo win, that go back only to the filing date of the lawsuit.
Google has refused to settle, and showed no interest in buying the company. Possible estimates before the back date announcement were upwards of $700 million; however, now the award could be sub-$100 million, if any. Either amount is a small portion of Google’s $40+ billion of cash and short-term investments.
Vringo inherited the lawsuit after its acquisition of Innovate/Protect. The Innovate/Protect lawsuit included patent infringement claims against Google, AOL (NYSE: AOL) and other mega-tech companies. AOL decided to partly settle its lawsuit by paying Vringo $100,000. Despite having fallen far from grace from its dominant position atop the Internet search game, the company has reformed itself into more of a media company with the 2011 acquisition of the Huffington Post. The company is now an interesting investment opportunity, trading at only 3x earnings. As well, the company is expected to grow five-year EPS at 25% annually. AOL also has big backers as investors, including Bain Capital, Jana Partners and David Shaw.
Regarding Google, the speculated amount that Vringo is looking for has been said to be around $700 million, where the company’s current market cap is a mere $160 million. The worry for Vringo investors is that if Vringo comes up short on the Google lawsuit they will have a tough time raising money to pursue other patent lawsuits, especially given the company has no sustainable earnings. Vringo has only $3.3 million left in cash, versus total liabilities of $5 million, and the company has burned around $4.8 million per year measured by cash flow from operations over the last four years.
Vringo recently bought 500 wireless patents from Nokia (NYSE: NOK) in August for $22 million. Vringo has recently filed a lawsuit against the U.K.’s ZTE using the patents acquired from Nokia. Although the patent sale by Nokia means cash for the tech company, there are still a number of concerns; this includes not being the laughing stock of the smartphone industry. In the hedge fund industry, Jim Simons dumped 50% of his 1Q stake during 2Q.
In short, Nokia has too many concerns over its core handset business for us to get excited about its Lumina line, as the company is expected to see earnings down 200% year over year by the end of 2012.
There are thirty funds with at least 5% of their 2Q 13F invested in Google. As well, the top two funds by shares owned, Lone Pine Capital and Lansdowne Partners, had almost 5% and 10%, respectively of their 13Fs invested in the company.
Following Google’s botched earnings release, Oppenheimer downgraded the company. Google posted last quarter earnings of $9.03, compared to consensus of $10.67. The company has promising growth but there have been concerns over the site’s revenue and its Motorola acquisition. Motorola recorded an operating loss of $527 million, and Google took a $349 million charge associated with the business.
Although we would not invest in Vringo given its bleak outlook and overly speculative nature, we might hesitate to pull the trigger on Google. The Vringo lawsuit is likely weighing very little on the shares, but we still believe that Google may be peaking; check out our three reasons why.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. 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.