2023-07-15 04:08:39 ET
Summary
- InterDigital, a global R&D company, has seen an upward trend in share prices due to license renewals and new agreements and is investing in 6G network and video codecs.
- The company generates revenue primarily from licensing its intellectual property to manufacturers of consumer electronics products and has renewed agreements with companies like Samsung Electronics and Apple Inc.
- Despite the risks of costly arbitration and litigation proceedings, InterDigital is financially stable with a strong balance sheet and cash flows and is undervalued compared to industry medians.
Investment Thesis
InterDigital, Inc. (IDCC) enables and enhances wireless communications by designing and developing technologies. The company provides transmission and video coding technologies, technology solutions used in digital wireless and cellular products, develops cellular technologies, and is involved in artificial intelligence R&D.
The company's share price has seen an upward trend, increasing by 60.2% over the past twelve months. Its primary business involves licensing its patent innovations to client companies. License renewals and signing new agreements ensured that InterDigital continued to generate revenues, which eventually reflected in the share price. IDCC is also investing in the R&D of the 6G network and video codecs, which are its potential growth drivers. Additionally, the company is financially stable and has a strong balance sheet and cash flow. It is also undervalued, making it a great entry point for potential investors.
Overview
InterDigital is a large global research and development company focusing mainly on designing and developing visual, wireless, and corresponding technologies in various regions, including Europe, China, South Korea, Japan, Taiwan, and the United States .
InterDigital provides technology solutions such as 2G to 5G as well as the Institute of Electrical and Electronic Engineers [IEEE] 802-related networks and products utilized in wireless products. It is also involved in developing cellular technologies such as those related to Orthogonal Frequency Division Multiplexing Access [OFDMA]/ or Orthogonal Frequency Division Multiplexing [OFDM], Code Division Multiple Access [CDMA], Frequency Division Multiple Access [FDMA], Time Division Multiple Access [TDMA] and Multiple Input and Multiple Output [MIMO]. These are used in mobile terminal devices and 2G to 5G wireless networks. Additionally, the company offers transmission and video coding technologies and is researching visual technologies such as Virtual Reality as well as Artificial Intelligence [AI]-based video coding.
The company operates through licensing its patent innovations or licensing them to businesses that provide entertainment and communications products and services, such as the Internet of Things [IoT], consumer electronics [CE], wireless communications, automotive, and video streaming. IDCC generates its income mainly from licensing its intellectual property. At the end of Fiscal year 2022, total revenues were $457.8 million , and $202.4 million in the first quarter of 2023.
IDCC's Licensing Business
IDCC's main source of revenue is licensing its intellectual property. Under device-based licensing, the company licenses its patents to manufacturers of consumer electronics products, such as televisions and mobile gadgets, who need to make, use, or sell products that align with the standards covered by its patent portfolio. InterDigital has inked various wireless license agreements with leading consumer electronics and mobile communications companies worldwide. They include Apple, Amazon Technology, Samsung Electronics, and LG Electronics, among others.
InterDigital also licenses its patents through platforms, meaning it distributes its innovations through a third-party platform. The company has joined with Avanci , a licensing platform allowing companies to obtain licenses to use cellular technology complying with standards for the Internet of Things, and it has made headway in licensing InterDigital's 2G, 3G, and 4G patents. Some of IDCC's patent licensees through the platform are Audi, Porsche, and the BMW Group, among others.
In 2023, the company renewed its license agreements with some client companies, including Samsung Electronics, Panasonic Entertainment and Communications Co. Ltd., and Apple Inc. In January, IDCC and Samsung Electronics renewed their license agreement relating to 3G, 4G, and future wireless product patents. It also renewed its Digital TV and High-Efficiency Video Coding (HEVC) patents with Panasonic, a digital television manufacturer. In October 2022, InterDigital also renewed its patent license with Apple and entered into a seven-year patent deal. New license agreements include those with Amazon in 2022 and Alps Alpine and LG Electronics in 2023. The company inked an HEVC patent license with Alps Alpine, a manufacturer of electronic devices, and LG Electronics obtained a permit for IDCC's video coding portfolio.
These patent license agreements drive the company's revenues as well as its growth. Total recurring revenue in the first quarter of 2023 was $101.5 million, up from $99.1 million in the same period the previous year. The recurring revenue included Smartphone recurring revenue of $87.4 million and CE, IoT, and auto-recurring revenue of $14.1 million. Considering the license renewals and new licensees, I think InterDigital is positioned to witness solid recurring revenues.
Future Growth Potentials:
Potential in Video Codecs
As previously mentioned, the company provides video coding technologies, and through innovation, it leverages its expertise in video compression and codecs to enhance the user experience when streaming videos. Video codecs play a role in compressing and encoding video data into an efficiently storable format and using energy more efficiently. The capabilities of video codecs enable enjoying data-dense content across devices and screens, facilitating efficient and resourceful video streaming.
At least once a month, more than 3.5 billion people use the internet to stream or download videos, leading to video dominating internet traffic. At the end of 2022, Subscription Video on Demand (SVoD) subscriptions were at 1.47 billion, a 12% y-o-y increase in the number of subscribers. In addition, social media is increasingly popular for video content consumption, with time spent on video viewing increasing by 24% in 2023 compared to 2022.
The market size of global video streaming is expected to grow at a 19.3% CAGR from $554.3 million in 2023 to $1.9 billion by 2030. Factoring in this upward trend, it is clear that the video streaming industry's need to use more efficient codecs is escalating and will intensify in the future. This escalating surge in video consumption provides an opportunity for InterDigital to offer more solutions and innovations to enhance video compression and streaming. The company can leverage its expertise in video compression and codecs to renew and enter into new agreements with key players in the industry. Moreover, IDCC partnered with Phillips to research video-based immersive codecs to enable new opportunities, including Extended Reality.
5G and 6G Wireless Networks
Technology is always undergoing rapid and continuous development as new technologies are developed. Interdigital has taken a long-term approach in relation to future wireless technology. Not only is it aiding in defining the next 5G standard stages, but it is also already working on laying the groundwork for the next generation of wireless technology (6G) . However, 6G devices will take a couple of years to be available. Recently, the company forged a collaborative research partnership with the University of Surrey to focus on developing 6G enabling technologies.
Overall, I believe the company's investments in the research and development of video codecs and the wireless network 6G will contribute to its ongoing success in the future, considering rising video consumption and the dynamic nature of technology.
Balance Sheet and Cash Flow Strength [TTM]
According to the updated balance sheet , IDCC had a total cash and short-term investment balance of $950.68 million and total debt of $607.91 million, resulting in a net cash balance of about $342.77 million. This shows that the company's cash could be used to pay off its debts with no risk of default. With a total equity of $625.3 million, the debt-to-equity ratio was 97%, indicating a reasonably leveraged balance sheet. Its EBIT of $242.3 million covered the interest expenses of $36.1 million by about 6.7 times. This further shows that the company could safely make its debt payments.
InterDigital's cash could be used to service its debt and cover its operating expenses of $239.3 million. In addition to its cash, cash from operating activities amounted to $276.16 million, an increase from last year's $122.3 million. The cash from operations was also higher than the sector average of $53.77 million, indicating that IDCC has a stronger ability to generate cash from its daily business activities than other companies. Free cash flow was $272.2 million, an increase from $119.8 million in the previous year. The free cash flow was 112% of its EBIT, which was quite impressive. The company also increased its EBIT over the last twelve months by 105.68%, indicating a growth in earnings.
In summary, InterDigital has a strong balance sheet with more cash than debt and strong cash flows. This indicates that the company is financially stable and can meet its financial obligations, such as investing in growth opportunities and paying its shareholders.
Valuation
IDCC is trading at a P/E ratio [TTM] of 16.03, and compared to the sector average of 26.0, it is undervalued based on relative valuation metrics. Given its financial stability, EBIT growth, its outperformance in the market, and strong growth prospects, I think the company's intrinsic value is yet to reflect in its share price. Using an EPS-based model with a forward EPS of 7.85, a growth rate of 15%, which is very conservative given its 3-5 year EPS CAGR of 18.28, and a discount rate of 9%, I arrived at a fair value of $117.03 and an upside potential of about 16%. Further, according to the Finbox DCF model, the company is trading way below its estimated fair value of $137.93, which lends credence to my assertion that it is trading at a discount.
It has an upside potential of 42.9%, which I believe the company can exploit, considering its future growth prospects. Given this decent valuation, I recommend the stock to potential investors. The disparity in my estimated fair value and the Finbox value can be explained by my very conservative assumptions.
Risks
As with any investment, it comes with risks. First, due to the nature of its business, the company is likely to be involved in various costly arbitration, administrative, and litigation proceedings. Its most recent court case was with Lenovo, and it had arbitration proceedings with Samsung when renewing its license agreement. Another challenging aspect of the company's business is its ability to renew current license agreements and ink new license agreements. Signing new agreements proves difficult since companies that InterDigital approaches are reluctant to take the licenses and establish agreements, which could potentially affect revenues and cash flows negatively.
Conclusion
In summary, InterDigital seems to be worth investing in for a number of reasons. First, it is financially stable, with a strong balance sheet and cash flows. In comparison to the industry medians, the company is undervalued and invests in the research and development of new technologies and innovations to enhance existing ones. Further, it investing in future growth potentials, namely, 6G and video codecs. Prospective investors should beware of the risks inherent in the stock.
For further details see:
InterDigital: Stable Company With Brighter Horizons