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Sydnee Gatewood
Sydnee Gatewood
Articles (3564) 

FPA Capital Comments on InterDigital

Guru stock highlight

August 05, 2020 | About:

InterDigital, Inc. (NASDAQ:IDCC):21

Business description:

  • InterDigital monetizes IP in the wireless tech space. The Company is not a basic patent portfolio manager or a patent troll but, rather, is an inventor of patents with 290 engineers worldwide. IDCC spends significant sums on research and development and files patents on technology considered essential for the wireless device industry. In turn, it demands licensing revenues for its 31,000+ patents.
  • On 03/01/2018, IDCC purchased Technicolor’s portfolio of 21k+ patents (deal closed in July 2018).

Why we like the business:

  • There has been tremendous growth in wireless communication (and expected to continue) yet it is hard to predict future market share of any individual company, but it is also hard to disagree with the growth of wireless communication.
  • The big two – Apple and Samsung – are under contract (+ many more). Signed first Chinese OEM (ZTE) in Q3’19 followed by Huawei in Q2’20.
  • Future growth opportunities: 5G, Internet of Things (IoT), Video, and Artificial Intelligence (AI).
  • Operating leverage: recurring revenue has been increasing at a greater pace than operating expenses.
  • Strong balance sheet and a history of wise capital allocation.

Why we had an opportunity to invest:

  • Huawei agreement expired at the end of 2018 and the company has been negotiating with them since. The lost revenues were significant. Then COVID-19 happened, so the announcement that Huawei agreement was done in April 2020 went largely unrewarded.
  • IDCC decreased their share count from 45mm at the end of 2010 to 35.5mm today. Net cash makes up more than 30%+ of the company’s market cap.
  • A potential new revenue stream – IoT that has not materialized yet.

Thesis:

  • We believe that the use of wireless connected devices will continue to grow and we want to invest in a company that supplies its technology to all the players. In essence, IDCC is a backdoor way to participate in the growth of mobile communications. In addition, the company has expanded into video and other markets as a way to further monetize its patent portfolio, which we believe will bear fruit.

KPIs

  • Recurring revenues minus cash costs à is the company continuing to generate strong free cashflow?
  • Contract signings and renewals.
  • New patent applications and approvals.

From FPA Capital Fund (Trades, Portfolio)'s second-quarter 2020 commentary.


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