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INTRINSIC VALUE ASSESSMENT OF
INTERDIGITAL INC. (IDCC)
MAY 11, 2018 This article was written in with David J. Flood from The Investor’s Podcast
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
IntroductionInterDigitalInc.isanAmerican-basedmobiletechnologycompanywhoseprincipalbusinessinvolvestheresearchanddevelopmentofwirelesstechnologiesformobiledevices,networks,andservicesworldwide.Thefirm’smarketcapcurrentlystandsataround$2.68Billionanditsrevenuesandfreecashflowsforthepreviousfinancialyearwerearound$533Millionand$279Millionrespectively.Thecompany’scommonstockhasfluctuatedbetweenahighof$88andalowof$68overthepast52weeksandcurrentlystandsataround$77.IsInterDigitalInc.undervaluedatthecurrentprice?
The Intrinsic Value of InterDigital Inc.TodeterminetheintrinsicvalueofInterDigitalInc.,we’llbeginbylookingatthecompany’shistoryoffreecashflow.Acompany’sfreecashflowisthetrueearningswhichmanagementcaneitherreinvestforgrowthordistributebacktoshareholdersintheformofdividendsandsharebuybacks.BelowisachartofInterDigitalInc.’sfreecashflowforthepasttenyears.
Asonecansee,thecompany’sfreecashflowhasbeenlumpyoverthepastdecadewhichisaresultofthefactthatsomeofthefirm’sroyaltiesforpatentlicenseagreementstaketheformofroyalty-bearingagreementswhileothersareonapaid-up-frontbasis.Furthermore,insomeyears,morelicensingagreementscomeupforrenewalwhichleadstofluctuationsinrevenuesandearnings.TodetermineInterDigitalInc.’sintrinsicvalue,anestimatemustbemadeofitspotentialfuturefreecashflows.Tobuildthisestimate,thereisanarrayofpotentialoutcomesforfuturefreecashflowsinthegraphbelow.
INTRINSIC VALUE ASSESSMENT OF
INTERDIGITAL INC. (IDCC)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
Whenexaminingthearrayoflinesmovingintothefuture,eachonerepresentsacertainprobabilityofoccurrence.Theupper-boundlinerepresentsa15%growthratewhichtheauthorhasusedinsteadofInterDigitalInc.’s22%growthrateforthelasttenyears.Thisisbecausecompaniescanseldommaintainsuchahighgrowthrateforprolongedperiods.Thisgrowthratehasbeenassigneda10%probabilityofoccurrencetoaccountforsomefactorsincludingtherapidrateofchangewithinthetechnologyindustry,thehighlevelofcompetition,andthefactthatthreeofInterDigitalInc.’slicenseagreementsaresettoexpirein2018.
Themiddlegrowthlinerepresentsa5%growthratewhichisbasedonthefirm’shistoricalrevenuegrowthfortheprevioustenyearsless5%toaccountforfluctuationsinrevenuesandearnings.Thishasbeenusedasearningstendtoreverttowardthisrateofgrowthasacompanymatures.Thisscenariohasbeenassigneda50%probabilityofoccurrenceinlightofthepotentialrisksoutlinedabove.
Thelowerboundlinerepresentsa-10%rateinfreecashflowgrowthandassumesthatthecompanysuffersacontractioninearningsduetocompetitivepressureorthelossofmajorclients.Thisgrowthratehasbeenassigneda40%probabilityofoccurrence.
Assumingthesepotentialoutcomesandcorrespondingcashflowsareaccuratelyrepresented,InterDigitalInc.mightbepricedatan11%annualreturnifthecompanycanbepurchasedattoday’sprice.We’llnowlookatanothervaluationmetrictoseeifitcorrespondswiththisestimate.
BasedonInterDigitalInc’scurrentearningsyield,whichistheinverseofitsEV/EBITratio,thecompanyiscurrentlyyielding16.34%.Thisisbelowthefirm’s10-yearhistoricalmedianof12.90%.TheGlobalTelecomServicesIndustrymedianaverageof4.49%suggestingthatthecompanymaybeundervaluedrelativetoitshistoricalandindustrycomparisons.Finally,we’lllookatInterDigitalInc.’sfreecashflowyield,ametricwhichassumeszerogrowthandsimplymeasuresthefirm’strailingfreecashagainstitscurrentmarketprice.Atthecurrentmarketprice,InterDigitalInc.hasafreecashflowyieldof11.25%.
Takingallthesepointsintoconsideration,itseemsreasonabletoassumethatInterDigitalInc.iscurrentlytradingbelowfairvalue.Furthermore,thecompanymayreturnaround11%atthecurrentpriceiftheestimatedfreecashflowsareachieved.Now,let’sdiscusshowandwhytheseestimatedfreecashflowscouldbeachieved.
INTRINSIC VALUE ASSESSMENT OF
INTERDIGITAL INC. (IDCC)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
The Competitive Advantage of InterDigital Inc.InterDigitalInc.hasvariouscompetitiveadvantagesoutlinedbelow.
• IntangibleAssets.InterDigitalInc.ownsaportfolioofpatentswhichincludesapproximately2,400U.S.patentsandaround11,500non-U.S.paymentswhicharerelatedtofundamentaltechnologiesthatenablewirelesscommunications.Thecompanyconsidersthissuiteandthe5,300patentspendingtobeessentialtocellularandotherwirelessstandardsincluding3G,4G,and5G.
Figure1:IDCC2018Presentation,NeedhamGrowthConference
ByaggressivelydefendingtheseintangibleassetsandlicensingthemtoclientslikeAppleandSamsung,thecompanycanoutperformtheindustryonanumberofkeymetricswhichcanbeseenbelow.
• NicheAttribute.Byestablishingcollaborativerelationshipswithkeyindustryplayersandinternationalstandardsbodies,InterDigitalInc.hasembeddeditselfintothestandardsprocesstherebyensuringintellectualproperty.Thisisdevelopedtobecomeintegraltothestandardsadoptedbyavarietyoftechnologiesincluding3G,4Gandtheemergingtechnologiessuchas5GandtheInternetofThings(IoT).
INTRINSIC VALUE ASSESSMENT OF
INTERDIGITAL INC. (IDCC)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
Figure2:IDCC2018Presentation,NeedhamGrowthConference
• StickyBusinessModel.Throughthedevelopmentofitspatentportfolioanditsentrenchmentinthestandardsprocess,InterDigitalInc.hasdevelopedastickybusinessmodel.Thisensuresthatithasalong-termanddiverseclientbaseoflicensees.
Figure3:IDCC2018Presentation,NeedhamGrowthConference
INTRINSIC VALUE ASSESSMENT OF
INTERDIGITAL INC. (IDCC)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
InterDigital Inc.’s RisksNowthatInterDigitalInc.’scompetitiveadvantageshavebeenconsidered,let’slookatsomeoftheriskfactorsthatcouldimpairmyassumptionsofinvestmentreturn.
• WhileInterDigitalInc.hasabroadclientbaseoflicensees,itstillderivesasignificantproportionofitsrevenuesandearningsfromthetopplayersintheindustry.Apple,Huawei,Samsung,andBlackberrycomprisedapproximately21%,14%,13%and13%ofthefirm’stotal2017revenuesrespectively.Alossofoneormoreofthesecustomerswouldlikelyimpairthecompany’sfutureperformance,butthisisunlikelytooccurintheneartomid-termsinceInterDigitalInc.issoembeddedintheindustryandcurrentlyhasmulti-yearagreementsinplacewiththeseclients.
• Thetechnologyindustryissubjecttoarapidrateofchangewheregame-changingtechnologiescanemergewhichhavedisruptiveeffects.ThereisnoguaranteethatInterDigitalInc.,willnot,atsomepointinthefuture,besubjecttosuchdisruptiveforceswhichlessenthevalueofitsintangibleassetsorrenderitsintellectualpropertyobsolete.
• Thereisconcernamongstsomehealthcaregroupsthatwirelesstechnologymaypossessthepotentialtobeahealthhazardforhumansandtheenvironment.Shouldtheseconcernsgainlargepublicsupportorbevalidatedbyalargebodyofconclusivescientificdata,InterDigitalInc.couldseedemandforitsintellectualpropertydeclineleadingtoanimpairmentoffuturerevenuesandearnings.
Opportunity CostsWheneveraninvestmentisconsidered,onemustcompareittoanyalternativestoweighuptheopportunitycost.Atpresent,10-yeartreasuriesareyielding2.96%.Ifwetakeinflationintoaccount,therealreturnislikelytobecloserto1%.TheS&P500IndexiscurrentlytradingataShillerP/Eof31.4whichis85.8%higherthanthehistoricalmeanof16.8.Assumingreversiontothemeanoccurs,theimpliedfutureannualreturnislikelytobe-2.5%.InterDigitalInc.,therefore,appearstoofferamuchbetterreturnforinvestorsatpresent,butotherindividualstocksmaybefoundwhichofferasimilarreturnrelativetotheriskprofile.
Macro FactorsInvestorsmustconsidermacroeconomicfactorsthatmayimpacteconomicandmarketperformanceasthiscouldinfluenceinvestmentreturns.Atpresent,theS&PispricedataShillerP/Eof31.4.Thisis85.8%higherthanthehistoricalaverageof16.8suggestingmarketsareatelevatedlevels.U.S.unemploymentfiguresareata30-yearlowsuggestingthatthecurrentbusinesscycleisnearingitspeak.U.S.privatedebt/GDPcurrentlystandsat199.6%andisatitshighestpointsince2009whenthelastfinancialcrisispromptedprivatesectordeleveraging.
SummaryInterDigitalInc.currentlyappearstobeentrenchedinthewirelesscommunicationsindustryoccupyinganintegralroleinthestandardsprocessandpossessingaportfolioofpatentswhichareessentialtoitsclientbase.Futuregrowthprospectsappearfavorablewithmanysegmentswithintheindustrypredictedtoexperiencesignificantgrowthinthecomingyears.
INTRINSIC VALUE ASSESSMENT OF
INTERDIGITAL INC. (IDCC)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
Figure4:IDCC2018Presentation,NeedhamGrowthConference
Withregardstoshareholder-friendliness,InterDigitalInc.hasbeenreturningvaluetoshareholdersintheformofdividendsandsharerepurchaseswhilemaintainingitsR&Doperationstoensurethedevelopmentofnewtechnologies.
Insummary,InterDigitalInc.isfacingsometailwindsincludingtheemergenceandproliferationof5G,IOT(InternetofThings),andautonomoustransport.ThecompanyisalsosettobenefitfromU.S.taxreformwithalowerdomesticrateof21%.Thecompanyalsonotesthefollowinginthe2018PresentationatNeedhamGrowthConference.“Onago-forwardbasis,wecurrentlyexpectasignificantportionofourincometoqualifyasForeignDerivedIntangibleIncome(FDII)which,undertheTaxAct,wouldbesubjecttoanevenlowertaxrateof13.1%.”
Basedontheconservativeassumptionsusedinthefreecashflowanalysis,InterDigitalInc.mayreturnaround11%atthecurrentmarketprice.
INTRINSIC VALUE ASSESSMENT OF
INTERDIGITAL INC. (IDCC)
ThisassessmentwasconductedfromthetoolsprovidedinPrestonandStig’sIntrinsicValueOnlineTrainingCourse.
Disclaimer:Theauthordoesnotholdownershipinanyofthecompaniesmentionedatthetimeofwritingthisarticle.
©TIPAcademycontentisforeducationalpurposesonly.Thecalculators,videos,recommendationsandgeneralinvestmentideasarenottobeactionedwithrealmoney.Contactaprofessionalandcertifiedfinancialadvisorbefore
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madefromusingthisassessmentorthetoolsmentionedintheassessment.
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