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Patent Stock Plays RSS Feed

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Key Patent Players: Stocks With Large Potential

Apr 4 2013, 05:11 by: Alexander Maxwell | includes: DSS, MGT, PRKR, VHC, VRNG, WDDD.OB Disclosure: I am long VRNG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Patent stocks have become an interesting concept as of late. Some people call them patent trolls, however from a pure speculation standpoint their idea has been quite interesting. There is a large amount of money to be made through correctly predicting a court's decision, and through being able to get in early in some of these patent companies. If you are looking to speculate based on some upcoming court decisions, I would refer you to my recent article. This article will address some of the patent companies that are currently generating buzz around the investment community.

 Vringo, inc. (VRNG). Vringo has had a much publicized lawsuit against Google (GOOG), in which the jury awarded Vringo $30 million plus a 3.5% royalty rate until the expiration of Vringo's patents. Vringo was litigating over how Google ranks ads, claiming that the algorithm used by Google infringed upon Vringo's patents. A key question of the trial has been 3.5% of what, Vringo maintains that it was 3.5% of the 20.9% revenue increase which Google saw as a result of infringing upon Vringo's patents. Google maintains that subsequent to how the jury calculated past damages, that it was 3.5% of 2.9% of the revenue increase. I would lean, however, towards the former.

 
VirnetX (VHC). Virnet X has won patent infringement lawsuit against some of the biggest players in the industry; including a recent win against Apple (AAPL) to the tune of $368 million. This verdict was due to VirnetX's patents related to network technology. Also of note is that the judge ordered for Apple to pay Virnet X more than $330,000 per day until the companies reached an agreement amongst themselves. Despite VirnetX's success, it has not been without bumps in the road. One major road-bump came when a jury ruled that Cisco (CSCO) did not infringe upon patents owned by VirnetX. Ironically, this was over the same technology as the technology utilized by Apple.

 MGT Capital Investments (MGT). MGT is a company with a rather small $10.74 million market cap. MGT represents, in my opinion, one of the better values out of the patent plays as it has a huge amount of upside potential should it win its upcoming patent lawsuit. MGT filed a lawsuit in November 2012 in the Southern District of Mississippi for patent infringement. In the lawsuit they allege that the defendants infringed and continue to infringe upon MGT gaming's (a majority owned subsidiary of MGT) patents regarding a "Gaming Device Having a Second Separate Bonusing Event". The defendants are some very big names within the gaming industry: Caesars Entertainment Corporation (CZR), MGM Resorts International (MGM), Penn National Gaming inc (PENN) and Aruze Gaming America. These are all companies that MGT has identified as either producing the infringing products, or as operators of the infringing products.

Worlds, Inc. (WDDD.OB). Worlds holds many different patents regarding the construction of Massively Multiplayer Online Roleplaying Games (abbreviated: "MMORPG"). Worlds made headlines when it filed a lawsuit against Activision Blizzard (ATVI). This is related to ActivisionBlizzard's extremely popular World of Warcraft and Call of Duty games. In this lawsuit, World's seeks unspecified damages, and demands a trial by jury.

Document Security Systems (DSS). This company is actually not your 'traditional patent troll' in the sense that it has revenue which is actually rather substantial, and an underlying business. In Q4 of 2012, DSS reported $5.4 million in revenue. However, the reason that the company is a patent play is due to Document Security Systems' upcoming merger with Lexington Technology Group. This merger is on pace to close in the spring of 2013. This should be well in time for Lexington's Markman hearing on October 2nd, 2013.

So what exactly makes Lexington/DSS an interesting patent play? It is who Lexington is suing that is grabbing headlines, they are suing Facebook (FB) , LinkedIn (LNKD), Novell, Broadvision (BVSN), and Jive Software (JIVE). Lexington, unfortunately, was not able to keep the case in the Eastern District of Virginia and the judge recently transferred the case to the Northern District of California. This could be significant in terms of a timeline for the case, there is a reason that Facebook and the other defendants wanted to move the case away from Eastern Virginia's fast-track. Not to mention the fact that a jury in Eastern Virginia is not necessarily the same as a jury in Northern California in terms of jury verdicts. Nonetheless, the case does seem to be making progress, and as soon as the merger is completed this stock could become one to watch very quickly going into the Markman hearing.

With DSS also having generated revenue, this stock is shaping up to become a very interesting patent play, and a favorable play for shareholders as the revenue generating Document Security Systems should help to offset the potential negatives of Lexington Technology Group losing (should it lose). A potential downside would be, although unlikely, if the merger does indeed fall through expect DSS's valuation to drop, as part of the movements of the lawsuit seem to already be baked into Document Security System's stock price. This stock has high potential, and is another case of a relatively small company taking on some rather large corporations.

ParkerVision (PRKR). Parker recently had a favorable Markman order versus Qualcomm (QCOM). Parkervision is a model for what a favorable Markman order can do for a stock. On the day before the Markman order, February 20th, ParkerVision was trading at $2.43 per share. The next day after the favorable Markman hearing is announced, ParkerVision was trading at $4.21 per share. This represents a substantial gain for shareholders due to the favorable markman ruling.

All of the patent plays mentioned have their merits, but they also face the risk of losing. Trying to predict a court result is inherently quite risky, but there is a great amount of money to be made should an investor pick correctly. Many of these companies are suing industry leaders, and each of the stocks mentioned, in my opinion, have the potential to grow in value as they continue to sue much larger corporations. Investing in patent stocks is inherently risky business. If a small cap company loses it is possible for the patents that the company holds to be worth nothing. However, it is also possible for a company to hit the proverbial jackpot like VirnetX has in terms of its Apple and Microsoft litigation.





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