New Article on SA:
Netlist Still Has The Patents
Sep. 12, 2022 9:48 AM ETNetlist, Inc. (NLST)1 Comment
Summary
Netlist is in what may be the largest patent infringement lawsuit in history.
Netlist has many promising court cases ahead.
Court cases are fluid and change by the day.
Empty American Style Courtroom. Supreme Court of Law and Justice Trial Stand. Courthouse Before Civil Case Hearing Starts. Grand Wooden Interior with Judge"s Bench, Defendant"s and Plaintiff"s Tables.
gorodenkoff/iStock via Getty Images
Introduction
I maintain a Strong Buy rating on Netlist (OTCQB:NLST). Netlist is currently embroiled in what may be the largest patent infringement lawsuit in history and also has a rapidly growing semiconductor business to go with it. I think the company's case against Google (GOOG) (GOOGL) may yield the largest infringement lawsuit in history. If not, I believe the aggregate of the multiple similar infringement lawsuits Netlist is pursuing will. The hidden jewel for Netlist is that the underlying business has grown over 100% since last year. Big picture, the upside is enormous from a settlement, and the downside is limited due to the rapidly increasing underlying business. I have been bullish on Netlist for over a year, and you can look at my continued support in my articles on Seeking Alpha.
Court Decisions
I have previously addressed all the major court cases in previous articles. For that reason, I would recommend going back and reading those for my more in-depth thoughts about a particular case. Below I have a fantastic summary from StockTwits poster Stokd that will hopefully help show the high level overview of the lawsuits.
netlist court case summary
Stokd
As is quickly evident from the diagram, Netlist is a highly complex company. Not only do investors have to value the company's business, but they also have to analyze multiple complex lawsuits and track them as they rapidly change. Add in the fact that the company lacks coverage by Wall Street due to its small market cap and OTC status, and investors have a very interesting opportunity. The only major settlement that Netlist has had was with SK Hynix for a number far below what many expected. Important points to remember about this case are that the company needed money at that time and that SK Hynix is not the big fish in these cases. I believe the company settled to give them enough funds to support the lawsuits they cared the most about it.
I want to highlight a few things on the diagram. The Google case on the far right is the premier case. Earlier in the year I wrote about Netlist's key win in this case. The highlight from the article was "Judge Seeborg has ruled on Claim 16 and denied intervening rights to Google, a massive win for Netlist. This makes Google liable for infringement of Netlist technology dating all the way back to February 2004." Considering the fact, which I have stated numerous times, that Google was already caught using the technology, there will be money to be made in this case. The question for me now becomes will CEO Chuck Hong settle, take the money, and move on or will he go for the jugular pushing this lawsuit until a jury verdict. While the latter would certainly yield more money, lawsuits are never a sure thing. Additionally, federal courts typically heavily encourage a settlement to save time and resources. I think the best decision is to settle and continue to build the company but I do not think this is likely.
The other thing I want to point out is that there are still multiple cases with Samsung (OTCPK:SSNLF) and Micron (MU) that Netlist sits in good positions. For example, Samsung had their previous contract with Netlist voided which makes all the licensed technology they sold during the period of the contract open to litigation. And, like the Google case, we know that they infringed Netlist technology. But, also like the Google case, the question remains will the company look to settle or take these cases to their conclusions? I will echo my sentiment about the Google case that the company will likely not look to settle. However, only time will tell us the true answer.
Financials
From the company's latest SEC filing, the company currently has $40.4 million in cash on hand, offset by $49.4 million in current liabilities. Because of the complexity of the company and rapidly changing nature of its lawsuits, the stock can move rather drastically and as a result leaves the stock with very high volatility. With that volatility, there is also very low liquidity in a position because of low volume compared to the outstanding shares. The company lost $4.9 million last quarter, equating to a loss of $0.02 per share. The costly lawsuits are dragging down the company's bottom line and limiting profitability. Once the suits end, the company will shed a financial and time anchor.
Risks
Netlist would be an interesting play without the lawsuits. It would have a much lower market cap but would be a rapidly growing chip company. However, this is not the situation. Instead, the company is mainly a series of binary plays surrounding lawsuits that can never be guaranteed to go your way, no matter how confident you are. While undoubtedly, there is a bottom for this company if the lawsuits fail, that bottom is below current prices. In the same vein, be aware of the time delays and uncertainty the American court system brings to a company. Finally, the underlying business is in a rapidly changing field where it is tough to develop any moat. For this reason, companies grow and fade quickly. This company is a high risk high reward investment.
Conclusion
I am maintaining my Strong Buy rating. The company is still in a good position in their court cases. Legal battles have been going on for over ten years, so a few more months to years are not the end of the world. Netlist is a rapidly evolving company on many fronts that can be difficult to follow. Stick to your original investment thesis and hold as long as it has not changed.
This article was written by
Jacob Braun profile picture
Jacob Braun
1.36K Followers
Jacob Braun is the Founder and CEO of Braun Capital. Before diving into the financial world, Jacob received a formal education in Mathematics and Computer Science, where he went on
