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Msg  43405 of 67953  at  12/20/2010 1:21:04 PM  by


For New IDCC Investors (as of Dec. 20)

This is an updated post of a previous post of mine designed for new IDCC investors.   Although the Wall Street analysts have missed the IDCC potential thus far, those of us on this discussion board have known about IDCC's potential for some time.     Now that Jim Cramer has given IDCC some exposure....the Wall Street boys, the mutual funds, the hedge funds, and the retail investors will be all over this stock.   It will become the new "hot stock" once people understand what IDCC patents cover, who will need to sign licenses with them, and what the revenue potential is.
IDCC has over 17,000 patents and this Intellectual Property is needed by all companies in the wireless industry, from Carriers (AT&T, Verizon, Sprint) to the Infrastructure providers (cell tower manufacturers, famptocell manufacturers, etc.) to the handset manufacturers (Apple, RIM, Samsing, LG Nokia, Motorola etc. etc.).   It's not just the handset manufacturers that need IDCC's IP.   About 50% of the handset manufacturers have already signed licenses, including four out of the top five (Samsung, LG, Apple, and RIM).  The rest will soon be forced to license IDCC's 3G patents.   They will all eventually have to license IDCC's LTE/4G patents as well (at higher rates).    As soon as Nokia signs a license, IDCC will immediately be earning about $6/share after tax.  As soon as a couple of others follow suit in the next 2-3 months, IDCC will be earning $7-8/share.   A year from now IDCC could easily be earning $15/share and in 2 years they should be earning at least $25/share or higher.   Put a PE of 25 on that, and we are talking about a stock price of over $600/share.
If you want more the information below very's not too late to invest in IDCC.   In fact....even at $50 - $70 per's not too late to invest.
IDCC's financial situation ($13/share in the bank with no debt and earnings of $3.50/yr) justifies a stock price of $75 right now (and it is quickly headed in that direction). But the growth opportunities for IDCC is where the story really becomes compelling. What if I told you that IDCC's annual earnings could easily jump to $7/share within the next  2-3 months (possibly in the next 2-3 weeks)?   Most people would think I am crazy.   I think that will happen because I believe Nokia will sign a license with IDCC at rates comparable to Samsung.   IDCC will probably add a couple of more small licensees in the next quarter as well. With IP companies....the additional revenue drops straight to the bottom line (and litigation expenses go down, so it's double positive effect on earnings).

IDCC is currently selling at a PE of about 9 (less their cash). The reason their PE is so low is because the market has not respected their IP after a loss to Nokia at the International Trade Commission. When Nokia signs a new license the "wall of worry" will come crashing down and IDCC's PE will quickly normalize to a PE closer to QCOM's PE (~25). I am 95% sure that a deal with Nokia will get done before the end of Q1 2011 (that's worst case...most likely it will get done before Jan 13th). When you put a 25 PE on earnings of $7/share...that's $175/share. In case you are wondering how likely a settlement will be with Nokia, you may wish to read this post.

Now let's look at the current value of IDCC's LTE/4G portfolio. Based on independent estimates that have been presented at least 3 times in recent IDCC analyst presentations and conference calls, for each .1% royalty on LTE/4G handsets, the net present value is $900 Million. No one knows for sure what rates IDCC will ultimately get on LTE/4G, but I can easily make a case for 1.5% (QCOM has published a FRAND rate of 3.25% and IDCC's LTE portfolio is neck and neck with QCOM, but we'll say that QCOM is #1 and IDCC is #2). Based on the value of their LTE portfolio alone, IDCC should have a market cap of $13.5 Billion, yet their current market cap is only about $1.9 Billion. In essence, if you just looked at the net present value of their LTE/4G IP portfolio alone, and ignored any value associated with their Wireless Convergence Technologies IP, their M2M IP, their new digital compression technologies, and their current 3G IP....then IDCC should be selling right now for well over $250/share. The fact that they are about $42/share gives investors a unique opportunity. If you care to read more about this, take a look at this post.

What if I told you that in 2 years IDCC could have annual earnings in excess of $26/share? I don't think that is pie in the sky....just look at size of the LTE handset market and put a royalty of 1.5% on it. If you question a 1.5% royalty, then let's be extremely conservative and project that IDCC only gets 1.2% on LTE/4G. If the market size is 150 billion annually (as has been stated), that's still $1.8 Billion dollars in royalties from the handset market alone. With only 44 Million shares outstanding, that is over $40/share in earnings (pretax) and over $26/share (post tax). Keep in mind we are only talking about royalties from the handset market....not the Wireless Convergence Technologies and other Network of Network technologies that I believe the carriers will have to license in order to solve the bandwidth crunch they are already facing. Also, this does not include any upside from the Machine to Machine (M2M) where IDCC has a virtual lock on that market due to their head start. This new M2M market is just starting to ramp and will be growing in leaps and bounds.

IDCC has been working on the bandwidth crunch issue for several years and they have technologies that are on the cutting edge for solving the bandwidth crunch that carriers are already facing. It's just a matter of time before we see companies like AT&T, Verizon, and Sprint signing deals with IDCC. A license with a major carrier (domestic or international) will immediately propel this stock into triple digits. This is the market Bill Merritt (IDCC CEO) has spoken of that is 5-7 times larger than the $150 Billion dollar handset market.

I was reviewing the Feb 2010 Conference Call recently (courtesy of Seeking Alpha) and these questions jumped out at me (highlights mine). Stop and run a calculator on Bill Merritt's comments about a market that is 5-7 times bigger than the $150 Billion handset market....even at's a huge number, and the market has not taken this into consideration as it has valued IDCC. I have no idea what royalty rate IDCC will capture on the Carrier market (AT&T, Sprint, Verizon, etc.)....but make no mistake, everyone will need IDCC's IP to solve the bandwidth crunch. Once one carrier (operator) signs...they will all be forced to sign to keep up with the competition.


Tom Carpenter - Hilliard Lyons

I wanted to follow up with your comments about the bigger pipes, more pipes and better pipes. Historically 99% of the licenses have been with handset manufactures, you have got 2 M2Ms, is the bigger push going forward going to be with handset manufacturers, infrastructure or the carriers or some combination of the above, may be kind of give us some more insight into how you see that business model, specifically the revenue stream changing over the next couple of years?

Scott McQuilkin (Note I think Seeking Alpha may have this incorrect and the responder was actually Bill Merritt CEO)

Sure, the idea is to actually create top technologies that would map across all of those markets or at least more than one of those markets right, so we get reuse of technology. Certainly that occurs with respect to the basic wireless technology, because not only does that appear in terminal units but it appears in infrastructure that is utilized by operators and it’s also now appearing in consumer electronics and other such devices. So that’s a core part of the program that will continue and have applicability across all those markets.

But we are looking at other technologies as well. An example would the compression technology. Compression technology is very important in the wireless space, because there’s a need to create the smallest packet carrying the most amount of data across that network, but compression technologies also pop up in many other devices, as you know, some of the non-wireless. So again the idea is to try to create technologies that has very significant volume flow in the market.

As far as how we would go to market with these additional technologies, that is still -- I think we have a number of opportunities there, certainly with respect to some of the technologies that can be a direct licensing strategy for example with the infrastructure side of the business. I think there are other opportunities though with respect to some software solutions like MIH and other things where the better play may be directly up to the operator, because you are providing substantial either cost reduction or operational efficiency to them, and you know a lot of times, the person who delivered value too is going to pay with the highest value back, and so we have to think about where that technology is creating the best of the highest level benefit, and so that’s being worked at the current time. The idea at the end of the day of course is to move from participation in this $150 billion market into a market that is five or seven times bigger than that. And if we can do that successfully, I think it becomes very, very significant growth story for the company.

Here are a few of the technologies that I think we will soon start seeing licensed by carriers (operators as Bill referred to them).

IDCC is currently grossly undervalued. Their recent dividend announcement will attract numerous new mutual fund  investors.   Actually, I think the funds will stampede to a company like IDCC. Where else can they buy a dividend bearing stock that has the growth prospects of IDCC?   In 2-3 years, IDCC could be a $600 stock....all it takes is a Nokia license and a license with a major carrier (AT&T, Sprint, Verizon, etc. to open the floodgates)
Do your own due diligence. I suggest you read the transcripts of the last four conference calls and start playing with the royalty numbers and the possible rates and see for yourself what the upside potential is for this company.

Here are a few of posts that might be worth reading if you are interested.

If you decide to invest....good luck.


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