Intellectual Property Offers Investment Opportunities

Johan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investing in intellectual property can be lucrative. There are several companies out there that focus strictly on monetizing IP, so let's go through three stocks that operate in the IP field to see if any pique your interest.

Google's Playmate

Vringo (NASDAQ: VRNG) engages in the innovation, development, and monetization of intellectual property and mobile technologies. Vringo`s intellectual property portfolio consists of over 500 patents and patent applications covering telecom infrastructure, Internet search, and mobile technologies. The patents and patent applications have been developed internally, and acquired from third parties. Vringo operates a global platform for the distribution of mobile social applications and services.

Vringo is an opportunity that you should watch closely. Some weeks ago the U.S. Patent and Trademark Office said that it had confirmed the validity of a Vringo search engine advertisement patent that was the focus in a $30 million infringement verdict last year against Google and other companies.

The patents describe a ranking system, used by search engines, to target ads at consumers. The suit focused on Google's use of "quality scores" to rank ads, which combine an ad' content relevance to a search query, along with click-through rates from previous users.

Recently, it announced disappointing second quarter results, despite its cash position of approximately $46 million. The company's net loss was $11 million or $0.13 per basic share. The costs related to the ongoing litigation against Google and others, as well as general and administrative expenses, were $6.1 million. Enforcing patents can take years of costly litigation; it requires adequate cash flow and cash reserves.

IP Power House

Acacia Research (NASDAQ: ACTG), through its subsidiaries, acquires, develops, licenses, and enforces patented technologies in the United States. It assists patent owners with the prosecution and development of their patent portfolios; protection of their patented inventions from unauthorized use; generation of licensing revenue from users of their patented technologies; and enforcement against unauthorized users of their patented technologies. The company owns or controls the rights to approximately 250 patent portfolios, which include the United States' patents and foreign counterparts covering technologies used in various industries.

The company is already an IP-leader and offers a dividend yield of 2.2%.The company has $320 million of cash and investments, short term receivables total approximately $70 million, and it has no debt on its balance sheet.

Last week the company announced that a subsidiary had acquired a patent portfolio relating to semiconductor testing technology. With a forward P/E of around 10, there is some upside potential for the stock to test the $30 mark in the coming months.

The Last One

RPX (NASDAQ: RPXC) provides patent risk management solutions in the U.S., Japan, and elsewhere. The company offers a subscription-based patent risk management solution that facilitates exchanges of value between owners and users of patents. It provides a defensive patent aggregation in which it acquires patent assets to provide clients with licenses to protect them from patent infringement assertions.

The company also offers access to its proprietary patent market intelligence and data. Its clients include companies that design, make, or sell technology-based products and services, as well as companies that use technology in their businesses.

Second quarter results were better than estimates, but the company did not raise expectations and stayed with its full-year earnings guidance, which was $50 million to $53 million. With a forward P/E of around 15, there is room for the stock to rise.

Risks

For investors looking at increasing the alternative assets portion of their portfolio, investing in the economic benefit of Intellectual Property may be suitable. However, despite their promising upside, IP stock investments come fraught with hidden pitfalls.

The main risk is that a key patent could be found invalid, either following a legal decision or simply as the result of a rumor or an attack. A second pitfall deals with patent claims that are not broad enough to prevent the emergence of non-infringing alternatives, newer innovations are designed to work around existing patents. Lastly, enforcing patents can take years of costly litigation; it requires adequate cash flow and cash reserves—even to defend off dubious claims.

Worse yet, litigation often has interim results, leading to large, unpredictable share price movements. More often than not, these pitfalls of intellectual property investing can be mitigated by sophisticated due diligence and specialized expertise. To those who successfully navigate the inherent perils, IP investing offers outsized returns as its a valuable commodity. With more significant cases being handed down, the publicity of IP is growing, and the value will continue to grow.

Final words

Patents are now routinely acquired by investment groups as part of an enforcement and licensing strategy. Because of the vast (and rapidly growing) number of IP assets, asset-based investment opportunities will always be available. Take a look for yourself to see if IP companies have a place in your portfolio.

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Johan Seijkens has no position in any stocks mentioned. The Motley Fool recommends RPX. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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