Individualinvestor.com:(2/9/00): Why We Still Like Interdigital Communications
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Staff Writer: Eliot Walsh (2/9/00)
Late last year, investors quickly bid up shares of Interdigital
Communications (AMEX: IDC - Quotes, News, Boards)
from their yearlong slumber. In just the last three trading
sessions of the year, the stock of the next-generation
broadband wireless developer more than tripled to $82.
They must have had visions of Qualcomm?s (NASDAQ:
QCOM - Quotes, News, Boards) 2500% 1999 yearly
returns dancing in their heads, and frankly, so did we.
At almost the same time the stock was peaking, we ran a
story called ?Interdigital: The Next Qualcomm?? No sooner
did we broadcast our faith in this company, whose chief
value is its ownership of a slew of patents for wireless
technology, then its shares embarked upon the downward
slope of the roller coaster, falling almost as rapidly as they
had climbed.
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Tuesday, the stock closed at $32.19, gaining $0.94 for the
day.
But we think there?s plenty of life left in it.
To be frank, our readers let us know they weren?t happy with
the stock?s performance, but our message is just relax. The
world?s not coming to an end.
A portfolio manager who owns a big chunk of IDC?s stock
says, ?At $32 I would be more into buying this stock than
selling it right now.? This from a man who bought massive
amounts of IDC back when it was trading in the single digits.
The portfolio manager asked not to be quoted by name.
Otherwise his firm?s rules would prohibit him from trading in
the shares for the next 10 days. But this is someone who
just met with IDC?s management, and he remains very
bullish on the stock. His rationale remains essentially the
same as it was two months ago, when he first told
individualinvestor.com that he liked this company?s shares.
?They?ve got a massive patent portfolio, and they have the
financial wherewithal to make it all happen: more than $85
million in cash and no debt,? he says. ?Time will tell, but I
still believe IDC has the possibility of becoming a
mini-Qualcomm.?
According to Charles ?Rip? Tilden, Interdigital?s executive
vice president of communications and strategic planning, the
company has more than 800 patents worldwide, with 270 of
them in CDMA technologies, and the rest in TDMA, both of
which are standards for wireless devices such as cell
phones.
The company?s largest source of revenue is the licensing of
these technologies to wireless companies. Tilden says,
?Today, Interdigital has 21 TDMA licensees, who have
contributed about $250 million to $260 million in revenue.?
Tilden explains that the nature of Interdigital?s TDMA revenue
flow is changing. In the past, licensees generally paid their
royalties in a lump sum, which usually included a deposit
toward future royalties.
As the deposits run out, licensees are required to pay a
new, recurring stream of royalties going forward.
?That revenue stream is just beginning to grow,? says Tilden.
?We will get in to more specifics when we announce
earnings on Friday.?
IDC pins its biggest hopes on wideband-CDMA technology,
which will be used in high-speed, high-bandwidth wireless
data transfer for mobile phones, computers, and PDAs in
3G, or third-generation, wireless applications.
Tilden says that wideband-CDMA, or WCDMA, is expected
to be adopted by the international cell phone companies that
now use the GSM wireless standard.
In contrast, IF95, the CDMA technology espoused by
Qualcomm will migrate towards a platform called CDMA
2000, somewhat avoiding head-to-head competition with
Interdigital. Currently, says Tilden, about 15% of the world?s
mobile phones employ IF95 technology.
In fact, the promise of CDMA in 3G applications sparked
much of the interest in both Qualcomm and Interdigital.
?It?s not a value stock anymore,? says the portfolio manager.
?It?s moved from value mode to growth mode. I do believe this
company is for real. The thing is, they have yet to
demonstrate their ability to move beyond Nokia (NYSE: NOK
- Quotes, News, Boards),? he insists, referring to
Interdigital?s royalty-bearing 3G development partnership with
the wireless communications giant.
?It?s a ?show-me? stock,? says the manager, ?but I?m not
selling at this price. IDC has a lot of hot irons in the fire; if
just one of them should catch on, that?s all they need.?
?We are working very vigorously with potential licensees to
arrange wideband-CDMA deals,? answers Tilden. He believes
that since W-CDMA technology is at an earlier stage of
adoption than TDMA, the revenue from future deals may
avoid the ?lump-sum? phase altogether.
?We do believe we will be successful licensing our CDMA
patents,? Tilden says. ?And TDMA will be used in
conjunction with W-CDMA in 3G applications. TDMA will be
around for a long time to come.?
Even if IDC is, as the portfolio manager says, ?in growth
mode,? he still sees a great deal of value. ?Compare it to
some of the other companies in its space,? he says. ?IDC
has a $1.5 billion market cap. Qualcomm?s is $95 billion. In
light of what these companies are trading for these days, if
IDC can prove itself, if management is right, I think a $5-$10
billion market cap is entirely possible if they got any
additional licensees or contracts.?
But what?s with all the mystery surrounding this stock?
The company hasn?t had any sell-side coverage since
Morgan Keegan?s Ram Kasargod abandoned it with a ?hold?
rating while the shares were still in the single digits.
What gives?
Kasargod was not immediately available for comment.
?Perhaps both Qualcomm and IDC moved too far, too fast,?
the portfolio manager reflects. ?Why is there no analyst
coverage? Well, they either looked at it and passed, or they
looked at it and didn?t get it. Unless you?re a patent lawyer,
this is a very difficult company to analyze.?
Tilden says, ?We are in the process of presenting our story
to analysts, although I can?t make any guarantees. But we
are seeking analyst coverage for the company.?
For the last three years or so, revenue has been all over the
map, owing to the bifurcated structure of the company?s
royalty fee collection. Total revenue has declined
significantly as TDMA-based lump-sum payments decline.
When the company announces on Friday, look for an
upward trend in recurring revenue from TDMA royalties, as
well as further guidance on the company?s efforts to ramp up
CDMA licensing fees.
Bottom Line:
Despite the stock?s recent volatility, IDC remains an
undervalued company in a white-hot space?that of
next-generation, broadband wireless communications.
The company is confident it can execute, but
investment information on the company is not as
readily available as it is for other wireless companies,
and retail investors should take an extra measure of
due diligence before they get into this stock. |
