Enterprise Value = $2.007 billion
Operating Income = $365.34 million
EV/Operating Income = 5.49x
Price/Revenue = 4.54x
Earnings Yield = 9%
Debt/Equity = 34%
Debt/EBITDA = .68x
Interdigital develops technology patents (they currently have over 20,000 of them), primarily for the wireless industry. They make their money by licensing this technology to other companies. They license tech used for all of the big wireless companies, including Apple and Samsung. IDCC also derives revenue from lawsuits when other firms violate those patents.
Over the long term, IDCC has performed well. Wireless is a global growth industry and they own some of the critical technology that makes it possible. In the last 10 years, the stock is up 268%, beating the S&P’s 79% return by a wide margin. However, the stock is extremely volatile and prone to big swings in price. In the last year, the stock is down 8.96%. The relatively bad stock performance despite this being in a growth industry are due to earnings volatility, which can be driven by swings in the outcome of litigation.
IDCC is ignored by the market because of its size and earnings volatility compared to tech giants. The patents generate a significant amount of free cash flow, giving the stock a free cash flow yield of 10.49%. The ample free cash flow enables IDCC to remain a player without having to accrue significant debt levels.
On an absolute basis, the stock is cheap, but it’s also cheap on a relative basis. If IDCC were an S&P 500 component, it would probably trade at a significantly higher valuation. A similar company like Qualcomm, who also develops wireless technology and leases patents, trades at a P/E multiple of 38.85. On “quality” metrics, IDCC is actually posting better returns on assets than Qualcomm. IDCC’s gross profit/assets are 21.78%, compared to Qualcomm’s 19%.
My only explanation for the discrepancy in price and quality is due to IDCC’s smaller market capitalization and choppy earnings results. If IDCC were an S&P 500 component, I think it would be valued a lot differently by the market, probably at a P/E of 30x or 40x.
IDCC is also not resting on its laurels. They continue to aggressively spend on research & development of new patent technology, averaging around $60-$70 million a year (19% of its operating income). They have close relationships with the wireless device manufacturers, so it is unlikely that competitors will enter their space and compete.
PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings. Read the full disclaimer.