Is InterDigital a Qualcomm Hardly Anyone Notices?
It's a leader in the latest generation of wireless technology -- and it's stock is way down now
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Qualcomm (QCOM) shares may have dipped
below $100 in Nasdaq's spring swoon, down by
half from the $200 they commanded as the new
millennium dawned in January. Yet the wireless
communications giant retains its position as a
leading wunderstock of the New Economy. It
remains up some 600% in just one year.
With a stock price that's 150 times the last 12
months' earnings, though, Qualcomm's best
days may be behind it. But some investors think
they've spotted the next Qualcomm: InterDigital
Communications (IDC), a 28-year-old King of
Prussia (Pa.) company with a strong balance
sheet and a stock that's followed by few on Wall
Street.
It's also has a new chief executive, Mark
Gercenstein, who comes from Motorola (MOT),
where he had worked for Spectrapoint Wireless,
a joint venture with Cisco Systems (CSCO), as
well as Iridium, the failed
satellite-communications network. That news,
plus InterDigital's plan to move trading in its
stock on Apr. 26 from the American Stock
Exchange to the Nasdaq, lofted the shares over
20, from 13, in three days' trading. That's way up
from the 4 they brought last July, but far below
their peak of 82, reached in January, partly on
Qualcomm's coattails.
COMPLEX COMMUNICATIONS. Like Qualcomm,
InterDigital holds and licenses a bunch of
patents on wireless technologies, including
several key ones that position it well in what the
telecom cognoscenti call "3G" -- third-generation
wireless communications. "InterDigital could
play a very significant role in this convergence of
Internet and wireless access," Gercenstein told
me. "I would not want to presume today to
compare us to Qualcomm, because of their
obvious success in the marketplace, their size,
and everything else. But it's clearly an objective
to shoot for." (See "From InterDigital's CEO, Two Days into the Job.")
The reason for his optimism is 3G. Digital wireless telecom networks,
built around 3G standards, are expected to roll out gradually over the
next several years. They'll permit far more complex communications. It
won't be just voice, as 1G technology permitted via analog cellular
phones, nor voice plus such small data bits as stock quotes or e-mail
like 2G digital cellular communications now allow. 3G is aimed at
sending whole Web pages and other hefty chunks of data to your
handheld computer or cell phone.
Right now, InterDigital's main chance for claiming a big piece of that
growth rests with Nokia (NOK), the huge cell-phone maker from Finland.
The two companies are tied by licensing and development agreements.
Nokia can back out of its 3G development project at any time. Yet
William Nasgovitz, the portfolio manager of Heartland Value Fund who
has followed InterDigital since 1996, expects the company will be able to
sell more licenses to grow and diversify its sources of revenue. "They
have a significant patent portfolio," he told me. " I think there's more to
come in terms of alliances and royalty income."
LEGAL MESS. Nasgovitz maintains some skepticism about InterDigital,
however, noting that the company has failed to deliver on earlier
strategic plans and has suffered turnover in the top job. Nor is he bullish
on InterDigital at any price. His average cost in 1.2 million shares is less
than $6 a share, including the 100,000 shares he bought this week at 13
1/8. That gives him a bit more than 2% of the company, but last year he
had nearly 18%, most of which he cashed in at prices as high as 79 last
January.
Less critical to InterDigital's future, but something that might catch Wall
Street's eye, is the patent litigation between InterDigital and Swedish
cell-phone giant Ericsson (ERICY). The legal mess goes all the way
back to 1993, when InterDigital alleged that Ericsson had infringed eight
patents. Ericsson denied the allegation and filed a countersuit claiming
that the patents were either invalid or had not been infringed. Just this
month, a Special Master appointed by the U.S. District Court in Texas
held a four-day court hearing on the merits of the case and is expected
to hand up his findings this year.
So the bullish argument for InterDigital is far from clear-cut. Yet next to
other wireless plays, the risk in the stock is limited. For one thing, it's
profitable: In 1999, it made $26.5 million, or 52 cents a share, on $71
million in revenues. At yearend, it had $96 million in working capital,
including $83 million in cash and marketable securities, against just $3
million in long-term debt. Gercenstein told me the company has no
current plans this year or next to sell more stock or issue debt to finance
operations.
If I were investing in the next generation of wireless communications, this
isn't the only stock I'd want to own. But it's one I would look over closely,
especially if I were ready to cash in gains in Qualcomm.
Barker covers personal finance in his weekly column, The Barker Portfolio, for Business
Week from Melbourne Beach, Fla. And he appears every Friday on Business Week Online |
