Flash Buy Alert: Wireless Technology Company Sitting on the Launchpad
August 18, 2011
Dear Technology Profits Reader,
Normally, I don't get involved in timing plays, short-term trades or swing trades in this newsletter. Our focus in this newsletter is long-term investing in technology and biotechnology companies with the potential to grow for many years to come. There is always an element of risk, of course. We know that some companies won't deliver on their potential. However, the ones that do will earn such huge returns over time that the average gains will outperform the markets.
However, sometimes it is apparent that big things can happen to a company in the near term, and if we don't move quickly, we can miss out on the opportunity to "get in while the getting in is good."
For this reason, I am going to issue a buy alert on InterDigital Inc. (NASDAQ:IDCC) right now.
I've been looking at this company for months. I've been reading research reports, examining the technology and talking to knowledgeable investors that have maintained a large stake in the company for many years. I think the company presents us with an excellent long-term investment. The original plan was to issue a buy recommendation in our next issue of Technology Profits Confidential, but I am going to do so now, for several reasons.
Valuable Patent Estate Puts InterDigital in the Cross Hairs
The first and most important reason is an obvious trend taking place in the wireless industry. All the big players, like Apple, Google, Microsoft, RIM, Ericsson and others are in a race to buy up valuable wireless patents to bolster their ability to compete in this fiercely competitive market. In last month's issue, I mentioned the June sale of Nortel's patent portfolio to a consortium of these companies for a jaw-dropping $4.5 billion.
This week, we saw another episode in what looks like an escalating patent war. Apple is blocking the sale of Samsung tablets in European courts based on intellectual property infringement claims.
Google also moved this week when it announced it would purchase Motorola Mobility Holdings (NYSE:MMI) for $12.5 billion. The day before the announcement, the company's market cap was $7.3 billion. Therefore, this represents a premium of over 71%. One of the major reasons given for the purchase was Motorola Mobility's large patent portfolio.
The big players are doing everything they can to establish defensive patent positions and protect their ability to compete in the emerging 4G wireless world. Google, Apple, Microsoft, Qualcomm and others have huge cash reserves, and are spending them to compete.
Nortel's patents sold for $4.5 billion, and it is implied that Google paid billions for Motorola Mobility's share of the IP space. However, by many measures, InterDigital's patent estate is considered to be superior to either of the others’. InterDigital has thousands of high-quality wireless patents created while developing digital wireless technology. It has also shown the ability to be part of the industry's standards process, which means that new wireless standards drive licensing and royalty revenue to it.
The company has been an innovator since the late 1970s, and many of its patents apply to the coveted 4G market. According to the Licensing Executives Society International (LESI), Motorola Mobility has 16 essential 4G LTE (Long Term Evolution) patents, and Nortel has 46. InterDigital, on the other hand, has 437 and a market cap of only $3 billion. Because of this, the company has become the center of a bidding war among the wireless giants. We won't know what will happen for sure until the bids come in on Sept. 5 or afterward, but any positive news could make the company's share price skyrocket.
Market Sell-Off Makes Good Companies Cheap Buys
The second reason I am recommending a buy right now is the recent market sell-off and the potential for a strong market rebound before the arrival of your next issue. A lot of great tech companies are oversold right now and can be picked up for cheap. As I write, the market is down 4% for the day, and many solid tech companies like InterDigital are selling off. The best time to invest in great companies is when the blood runs in the streets. I gave a brief summary of my thoughts on each company in our portfolio in my Aug. 5 alert.
Eventually, the market will rebound, and it might happen sooner than we think. However, even if it does not rebound, wireless communications and devices have been showing strong growth in grim economic times. This technological trend might be tempered by recessions, but it has not, and will not, go away.
Moreover, the Fed is meeting at Jackson Hole, Wyo., next week, and while no one can say with certainty what will emerge from that meeting, last year's event announced QE2 -- which goosed the markets for months. I'll admit that this is a weak reason to recommend now, rather than later. The recent inflation numbers have some analysts discounting the probabilities for a new round of quantitative easing, but the potential for QE3 exists. I hate to have to take "the Bernanke's" money pumping schemes into account, but that is the world we live in.
At this point, I'd like to summarize my thoughts on InterDigital. I am issuing this buy alert today, rather than next month, based on some speculative reasoning. My long-term view, however, is that this is a great company. I would recommend it anyway, even if the buyout speculation did not exist. It has proven itself, repeatedly, over a period of decades, and the company is developing new wireless technology that leapfrogs even the latest 4G techs being rolled out today. I'll have the full story for you in next month's issue.
Recommendation: Buy InterDigital, Inc. (NASDAQ: IDCC) up to $69.00.
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