Editor’s Note: This article has been amended for better reflect Vringo’s strategy. Motley Fool apologizes for any errors.
The world of patents presents a myriad of opportunities for investors. Technological innovation is one way of staying competitive as a company, but buying rights to a patent can be a quicker and more powerful approach as patents can have multiple applications. Major tech companies spend millions of dollars every year solidifying their own patent portfolios to build product lines around them, while other companies seek to purchase patents and leave the building to someone else.
Investing in individual patents or businesses that hold patents is only limited by the imagination on how to apply the patent, and of course, securing it. I see several companies with a competitive strategy for acquiring, monetizing and securing patents, including VirnetX Holding Corporation (NYSEMKT:VHC) and Vringo, Inc. (NASDAQ:VRNG). With a new hand at the helm, Spherix Inc (NASDAQ:SPEX) could also present another opportunity for investors to jump into the patent game.
Patent infringement creates opportunity
Acquiring and securing patents has become essential, even for those known for innovation. Apple Inc. (NASDAQ:AAPL) has been the biggest purchaser for the last two years, and is now ranked ahead of industry giants Hitachi, Panasonic, Canon, and Sony Corporation (ADR) (NYSE:SNE). This from a company leading in innovation, paving its own path, and producing its own game-changing products.
When discussing Apple in this context, it is important to note that money from patents can also be made by securing them. Back in 2010, VirnetX Holding Corporation (NYSEMKT:VHC) filed an infringement lawsuit against Apple and was awarded damages of $368 million. VirnetX is now able to collect revenues from more recent Apple Inc. (NASDAQ:AAPL) products, such as the iPhone 5 and iPad 4.
This windfall could make the company even more competitive in the patent acquisition game. VirnetX already has patented technology for secure communications, including 4G LTE security. Increasing its presence into the internet security software realm could make it a formidable competitor, since most wireless carriers are moving toward a secure 4G LTE network (Sprint, T-Mobile).
VirnetX Holding Corporation (NYSEMKT:VHC) currently has a market cap of $992.84 million, at a price around $19.41 per share. The company currently has no debt, with $38 million in cash. Analysts have pegged the average price target at $50.00, 150% higher than its current price.
“The best IP is not for sale”
One of the main issues with IP investing is that typically “the best IP is not for sale.” If a company is making money through market share, high gross margins, or a great licensing deal, it wouldn’t sell the associated IP. Investors cannot wait for an IP to be on the market because, by then, it generally is not associated with anything that makes money.
The case patent investors will be watching now is the Vringo v. Google. In November 2012, Google was found liable for infringing on Vringo, Inc. (NASDAQ:VRNG)’s patents — specifically the “420 Patent” and “664 Patent,” both of which were found to be valid. These two patents relate to search engine functions and information filtering. A 3.5% running royalty rate was awarded to Vringo, which runs until the patents expire in the first quarter of 2016.
Investors should note that Federal Circuit proceedings are an extremely slow process. But this case could end the same way the VirnetX Holding Corporation (NYSEMKT:VHC) case did — with little stock impact, but a nice wad of cash that Vringo can use strategically. Vringo currently holds total cash of $52.25 million and no debt. The market cap stands at $259.62 million.
Steady accumulation of patent portfolios
We’ve discussed certain strategies of patent companies: the “sit on what you have” approach with VirnetX Holding Corporation (NYSEMKT:VHC), and the “buy and fight tooth and nail to protect” approach with Vringo. There is also a model of steady accumulation of patent portfolios spread across multiple industries. This is one of the reasons I like Spherix Inc (NASDAQ:SPEX).
As technology booms, there will be no shortage of companies seeking IP rights to inventions. But innovation doesn’t only happen in technology, and it’s not the only arena in which patents can be applied.
Spherix Inc (NASDAQ:SPEX) has recently announced an agreement to acquire 222 patents from North South Holdings, which covers a wide range of growing industries. The Harris portfolio also has applicability in law enforcement communications, military, and homeland security – all areas where government spending is at an all time high.
Spherix Inc (NASDAQ:SPEX) is acquiring the company and its portfolio for roughly $82.4 million based on the $6.87 closing price of Spherix the day prior to the transaction letter. The current CEO of the company, Anthony Hayes, will become the CEO of Spherix once the merger finalizes, replacing the interim CEO, Harvey Kesner, at the end of August 2013.
Hayes is an accomplished lawyer with bar memberships in several states, a juris doctorate, and several years’ experience in litigation and patent commercialization. He personally led his firm through several ‘buy-and-flip’ patent deals that generated triple-digit returns.
Clearly, this leader knows how to monetize a patent. With past deals achieving a remarkable gross return between 200% and 400%, I find little evidence against his ability. Moreover, I agree with the recent assessment that Spherix Inc (NASDAQ:SPEX) could be the next ‘Vringo’.
According to the analyst:
Spherix has been a small company with minor business operations. Now it becomes an idyllic shell for merging in an IP portfolio. Next step: complete the merger and announce the high-profile lawsuit.
With the broad appeal of Vringo, the recent success of ParkerVision, the track record of Iroquois Capital and Hudson Bay, and lots of IP investors looking for the next real IP play… Spherix is the next play.
Spherix has total cash of $3.45 million and no debt. The company held no patents before its recent deal with Rockstar, but the merger with North-South Holdings will bring in a portfolio of 222 patents acquired from Harris Corporation, along with $2 million in cash. The stock has jumped over $4 since last week (ending July 26, 2013).
Summary
While the possible benefits and financial rewards of patents can hardly be overestimated, there are several pitfalls investors should be mindful of. The risk that a key patent could be found invalid, either following a legal decision or simply as the result of a rumor or attack, or patent claims that are not broad enough to prevent the emergence of non-infringing alternatives are big risks that are often costly.
That being said, the four companies listed above know what they’re doing. As long as Apple continues to innovate and apply for patents, there will be reason to invest in the company. Investors should watch the Vringo v. Google case closely for any new developments. In the case of Anthony Hayes and his track record, I see him using the “Vringo” model, and whatever these patents are that Spherix is getting, I am confident Hayes will achieve maximum profitability.
Bill Edson has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Bill is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 3 Patent Stocks to Buy and Hold Long-Term originally appeared on Fool.com and is written by Bill Edson.
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