InterDigital: Great Q1 Results, Now It's Undervalued
May 06, 2023 2:12 AM ETInterDigital, Inc.
Summary
InterDigital, Inc. is a $1.8-billion market cap company that develops technologies for wireless communications in different countries.
With a portfolio of >28,000 patents and applications, InterDigital is a market leader in quality, and its technology is licensed to some of the largest technology companies worldwide.
InterDigital reported strong Q1 2023 results, with revenue doubling to $202 million and adjusted EBITDA nearly tripling to $155 million.
The company's strategy of reducing the number of shares outstanding has been pushing the EPS CAGR by the high teens for the past decade, which is a lot.
I believe IDCC stock should trade at a higher P/E multiple - the fair value per share is over $99 per share, in my opinion. Therefore, I rate IDCC a "Buy."
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Violka08/iStock via Getty Images
The Company
InterDigital, Inc. (NASDAQ:IDCC) is a $1.8-billion market cap company that develops technologies for wireless communications in different countries. They create solutions for digital cellular and wireless products and networks, including 2G, 3G, 4G, 5G, and other related products. They also develop cellular technologies for various wireless networks and mobile devices, as well as for automobiles, wearables, smart homes, drones, and other electronic products. Additionally, they provide video coding and transmission technologies and engage in artificial intelligence research and development. IDCC's patented technologies are used in various products, such as smartphones, tablets, consumer electronics, and base stations. The company was founded in 1972 and is based in Wilmington, Delaware.
As it follows from the annual IR presentation [June 2022], the company invests more than 20% of its recurring revenue in R&D and employs ~55% of its total workforce as engineers, most of whom have advanced degrees and 90% of whom are inventors. With a portfolio of >28,000 patents and applications, InterDigital is a market leader in quality, and its technology is licensed to some of the largest technology companies worldwide.
IDCC's latest IR materials
IDCC's latest IR materials
Based on the latest IR presentation [Sidoti Conference, March 2023], IDCC's management has a market opportunity estimate of >$650 million in recurring revenue in device markets such as smartphones, consumer electronics, the Internet of Things [IoT], and automobiles. The company is also pursuing significant growth opportunities in new markets such as content and cloud services. With an experienced leadership team, InterDigital has completed over $1.75 billion in new contracts in the past 2 years, demonstrating increasing licensing momentum.
InterDigital reported strong Q1 2023 results [10-Q filing], with revenue doubling to $202 million and adjusted EBITDA nearly tripling to $155 million.
IDCC's 10-Q filing, Q1 2023
IDCC's 10-Q filing, Q1 2023
The results turned out to be unexpectedly good, beating the EPS and revenue consensus estimates by a wide margin:
Seeking Alpha News, author's notes
Seeking Alpha News, author's notes
What the Wall Street analysts did not take into account is the catch-up revenue from the Lenovo proceedings recognized in Q1 2023. In addition, revenue recognized by IDCC from its patent license agreement with Samsung, which expired on Dec. 31, 2022, will likely exceed the conservative revenue the company recognizes now, according to the company's chief financial officer, requiring another catch-up at that time around mid-2024. So the situation as in Q1 FY2023 could repeat next year, but this time with Samsung. But the analysts don't price this likelihood yet:
Seeking Alpha, IDCC's Earnings Estimates, author's notes
Seeking Alpha, IDCC's Earnings Estimates, author's notes
The licensing front performed well in Q1 FY2023, with IDCC's binding appreciation with Samsung proceeding according to plan, and the company remains confident that the new license with Samsung will reflect the value of its portfolio, based on the CEO's words during the most recent earnings call. The recent decision in the KCS with Lenovo has been positive, with the court ruling that Lenovo should pay InterDigital almost $140 million for a license to its 3G, 4G, and 5G patents through the end of 2023. So InterDigital continues to prove the strength of its portfolio in the Lenovo and OPPO cases. Adjusted EBITDA for the quarter was $155 million, resulting in a 76% margin, and cash balance reached $950 million.
The company has returned more than $700 million to shareholders since 2019 and is accelerating its commitment to return capital to shareholders through share buybacks and dividends. In Q1 IDCC increased its share repurchase authorization to $400 million, executed a $200 million Dutch tender, and repurchased 2.7 million shares. After a cooling-off period, the company repurchased around 350,000 shares for $25 million.
InterDigital's innovation pipeline is robust, with a record number of invention disclosures filed in Q1, and the company was named among the top 50 recipients of European patents in 2022. Also InterDigital has received recognition for having the highest quality patents in the fields of 5G and video codecs:
IDCC's latest IR materials
IDCC's latest IR materials
The recent appointment of a new Chief People Officer - Samir Armaly - and the nomination of a former TiVo and Xperi Executive to the Board of Directors show InterDigital's continued growth and development. IDCC's Chairman, S. Doug Hutcheson, expressed his belief that Samir's experience in global IP licensing and keen insight into key technology markets would be incredibly valuable in broadening the company's existing licensing programs and developing new opportunities.
The company's marginality confirms what I have been saying - there has been significant progress in margin expansion in recent years. Importantly, this success began in 2019 and continues to actively accelerate to date:
Seeking Alpha data, author's work
Seeking Alpha data, author's work
The same applies to the volumes of key operational indicators - IDCC is actively approaching the volumes of its most successful period 2015-2016:
Seeking Alpha data, author's work
Seeking Alpha data, author's work
IDCC's execs prove not only with words but also with deeds that the interests of shareholders are their priority. That's why buyback volumes keep piling up - management has not allowed itself to dilute, even against the backdrop of the 2016-2018 operating downturn. This is a good sign. In recent quarters, as we can see from the actual data, buybacks have only increased - on average over the last 10 quarters, IDCC has bought back 0.6% of total shares outstanding [QoQ], which I think is a lot. Since 2013, the number of shares outstanding has declined at a CAGR of ~2.9%, while net income has grown at a CAGR of about 15.2%, albeit with varying degrees of success, ultimately yielding a long-term EPS CAGR of about 18.62%.
Seeking Alpha data, author's work
Seeking Alpha data, author's work
The company keeps its debt-to-equity ratio below 1x, does not incur unnecessary obligations, and does not rely heavily on external financing. Yes, Q1 FY2023 was a relatively one-off quarter in terms of sales volume, but going forward, as we understand from management's [aforementioned] statements, such a one-off event can happen again in FY2024, and Wall Street estimates, based on what we currently see from consensus figures, will not be prepared for it [unless revised up, which is a positive tailwind for the stock].
Okay, but how is IDCC stock valued after the post-earnings rise of 9.4%?
Valuation
First off, let's take a look at IDCC's guidance for Q2 FY2023:
IDCC's press release, author's notes
IDCC's press release, author's notes
As we can see from management's guidance, diluted earnings [Non- GAAP EPS] should be somewhere in the range of $1.19 to $1.29, resulting in a midpoint of $1.24 per share - nearly 38% more than Wall Street analysts had forecast before the Q1 FY2023 release!
Why such a large discrepancy? The number of shares outstanding is expected to decline by 8.2% - and that's without taking into account the possibility of additional buybacks, which IDCC mentions in a small note [highlighted in red]. Even the revenue forecast of $102 million in the mid-range is already about 2% above the consensus.
With even fewer shares outstanding - IDCC plans to spend as much and as fast as possible on buybacks - EPS of $1.24 by the end of Q2 FY2023 should give us LTM EPS of $6.64. So the implied price-to-earnings ratio is only ~11x, which is many times lower than the historical median.
YCharts, author's notes
YCharts, author's notes
And that's amid renewed revenue growth in recent years, as we remember!
Therefore, assuming the realization of a highly likely renewed revenue catch-up sometime in mid-2024, and based on the LTM EPS figure I derived from next quarter's guidance, I assume that IDCC should be valued at least 15 times trailing earnings per share by the end of the second quarter of fiscal 2023. Based on this assumption, I calculate a price target of $99.6 per share and an upside potential of ~36% from yesterday's closing price. Therefore, IDCC stock is a Buy, in my opinion.
Summary Thesis
Of course, investing in InterDigital's stock comes with certain risks that you should be well aware of. The company heavily depends on a few large licensees and any change in business terms or termination of a license agreement could negatively impact its financial performance.
IDCC's 10-Q, author's notes
IDCC's 10-Q, author's notes
Also, the wireless communication technology and video codec industries are highly competitive, and the company must continue to innovate and maintain a strong patent portfolio to stay ahead of competitors. So look at IDCC's R&D basically like the cost of sales of companies in other industries. If there is a drop in demand in the end markets, it will hit IDCC hard.
Chart
Data by YCharts
In addition, the company has been involved in legal disputes in the past like the one with Lenovo - that's a legal risk, which could result in the loss of revenue or damage to its reputation.
Despite the listed risks, I find IDCC's offerings quite sticky. For instance, the company has been successful in renewing contracts with its major customers, such as Apple (AAPL) and Samsung (OTCPK:SSNLF), who have been licensed to use its technology even before launching their respective smartphones.
IDCC's latest IR materials
IDCC's latest IR materials
Moreover, the company's strategy of reducing the number of shares outstanding has been pushing the EPS CAGR by the high teens for the past decade, which is a lot.
Given the recent earnings beat and updated guidance, which exceed the consensus estimates by 38% for Q2 FY2023, I believe IDCC stock should trade at a higher P/E multiple - the fair value per share is over $99 per share, in my opinion. Therefore, I rate IDCC a "Buy."
Thank you for reading!
This article was written by
Danil Sereda profile picture
Danil Sereda
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Chief investment analyst at a small Singapore-registered family office. A generalist in nature, common sense investing approach. Mainly focused on special situations, IPOs, and undercovered/hidden stocks.
BS in Finance. The thesis description can be found in this article.
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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in IDCC over the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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