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.

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