The idiot from ML just woke up. Updates from underperform to a Buy with a 105 target. Mickey is cheering
Upgrade to Buy on strong pipeline & TAM expansion
Strong 1Q results and robust catalysts over the next 1-2 years (medium-term) drive us
to upgrade InterDigital, a leader in 5G device licensing, to Buy from U/P. The stock is up
+63% YTD, yet we view potential licensing agreements with Lenovo, Oppo, and Vivo as
key medium-term drivers, and raise our PO to $105, from $55. Given the unstable nature
of catch-up payments, we view FCF as a better representation of InterDigital’s stable
long-term performance, and our PO is now based on 19x 2024E EV/FCF, vs. prior 16x
2024E P/E.
Bullish on medium-term outlook and strong mgmt. team
We flag likely upside on the Samsung and Lenovo revenue contributions as another key
driver. InterDigital is currently in binding arbitration with Samsung and recently received
a favorable ruling in the Lenovo case. The company already recognizes these revenues,
though at a conservative level, and could see some upside once the cases finalize.
InterDigital also has ongoing cases with Oppo and Vivo, which should each add $40-
60mn in recurring revenues per year. In addition, we see stock upside from continued
growth beyond wireless into CE, IoT, and Autos, and note that strong share buybacks are
adding to the stock’s attractiveness (see page 3 for additional color on share buybacks).
Strong 1Q results lend further credibility to NTM upside
Driven by ~$85mn in catch-up royalties from Lenovo, 1Q total revenues grew 100% YoY
to $202mn, vs. Street’s 8%/$109mn estimates. Without Lenovo, total revenues would
have still beaten estimates by ~7%. Importantly, InterDigital’s position in the Oppo case
was also bolstered by the recent Lenovo judgment, and we could see a similar topline
impact once the catch-up payments are recognized, potentially in the next few quarters.
Catalysts in medium-term, but maintain LT concerns
Though we are bullish over the medium-term, we remain concerned about LT growth
opportunities. Namely, once the company secures licensing agreements with the
remaining Chinese vendors (Lenovo, Oppo, Vivo) and its wireless penetration reaches
~85%, from current 55%, topline growth could slow to low-single-digits, or even flat.
However, this could be offset by further growth of CE, IoT, and Autos, as well as
maturation of video streaming technology licensing, which is still in the early innings.
