InterDigital Raises Its Dividend, But It's A Complex Opportunity
Oct. 02, 2023 10:40 AM ETInterDigital, Inc. (IDCC)1 Like
Michael Wiggins De Oliveira
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Summary
InterDigital has recently increased its dividend and engaged in significant stock buybacks.
InterDigital's modest organic growth and uncertain future trajectory pose challenges for investors.
IDCC stock's valuation at around 18x forward free cash flows raises questions about its near-term attractiveness.
I am Michael Wiggins De Oliveira. I focus on the opportunity to profit from "the Great Energy Transition" using a traditional value investing methodology. I lead the investing group Deep Value Returns.
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Investment Thesis
InterDigital (NASDAQ:IDCC) is a research and development company primarily focused on wireless, visual, and related technologies. Its revenues came from the licensing of its patents.
As we surmise this analysis, what stands before us is a less than straightforward thesis, with enough bullish and bearish arguments for both sides of the trade.
On the one hand, InterDigital has recently raised its dividend payout by 14% y/y, on top of repurchasing around 12% of its stock so far in 2023.
On the other hand, InterDigital's growth rates leave a lot to be desired and I'm not sure that paying around 18x forward free cash flows is such a cheap valuation. But is that enough to warrant shorting the stock? I'm not sure. And yet, the stock is around 11% shorted already.
Yes, the business may not be particularly exciting. And while I recognize that there are far racier names around, at the same time, is one here to make money or to waste time (and capital) to chase racy stocks?
On balance, I find myself neutral on this name.
InterDigital's Near-Term Prospects
InterDigital engages in research and development to create cutting-edge technologies in wireless communication, video, and AI. They then monetize these innovations through licensing agreements with companies across various industries, contributing to the advancement of global technology standards.
InterDigital specializes in wireless and related technologies. Their core mission revolves around pioneering advancements that enable immersive, connected experiences across a wide array of communication services.
InterDigital's prospects extend to its patent portfolio, which holds nearly 30,000 patents and patent applications. Licensing these patents is a primary revenue source for the company, with license agreements secured from prominent players such as Apple, Samsung, Google, and more.
These licenses find applications in wireless communications, consumer electronics (''CE''), personal computing, and automobiles, see below.
IDCC Q2 segments
As you can see here, the vast majority of its business relates to the smartphone market. Even if the Consumer Electronics, IoT/Auto is delivering some growth, that's overshadowed by its lackluster progress in its Smartphone segment.
Moreover, during its earnings call, InterDigital noted the addition of new licensees. Arguing that the addition of new licensees in these areas emphasizes their ability to capitalize on opportunities across multiple verticals.
With this backdrop, let's now examine its financials.
Revenue Growth Rates Require Interpretation
IDCC revenue growth rates
Recall, InterDigital's Q1 2023 saw its revenues jump. Note, that the strong increase in revenues was due to the positive settlement of the Lenovo trial. That isn't an underlying organic jump in InterDigital's revenue growth rates.
In fact, the business is growing at a very slow clip. The organic revenues are fairly stable at approximately $100 million per quarter. And immediately we get to the heart of the argument that is weighing on the stock.
Bears would argue that it's difficult to ascertain the medium-term trajectory of the business. As we look out to 2024, what sort of growth rates are reasonable? 5%? 10%? Or perhaps, we'll end up seeing negative growth rates?
One must form a strong view of this element before one builds substantial conviction in this stock.
InterDigital's Dividend Increases 14% Y/Y
Typically, I would say that there are enough hairs on this business to assert it with a sell rating. However, this is where the plot thickens.
On the one hand, we can see that InterDigital's current deferred revenues are smaller than they were a year ago.
IDCC Q2 2023
Deferred revenues are an indicator of future revenues to be recognized. And the red arrow doesn't inspire much hope.
On the other hand, InterDigital has been actively repurchasing shares, reducing outstanding shares by 12% since the beginning of the year. Furthermore, together with its reduced share count, InterDigital has increased its dividend by slightly over 14%, so that the yield now stands at just a nudge below 2%.
Consequently, even though InterDigital's cash flows are going to be bumpy, the fact of the matter is that the stock is meaningfully shorted, and I'm not convinced there's enough here to warrant shorting the stock.
The Bottom Line
InterDigital primarily focuses on researching and developing wireless technologies. The company generates its revenue through patent licensing agreements with prominent industry players. While InterDigital recently increased its dividend by 14% and has embraced a substantial share buyback program in 2023, its growth rates have been modest, and its valuation at approximately 18x forward free cash flows may not be considered cheap.
The debate surrounding the stock centers on its sluggish organic growth, with questions about its future trajectory and the potential for negative growth rates in 2024.
Despite these concerns, InterDigital, Inc.'s active share repurchases and increased dividend yield of close to 2% make it a complex proposition, especially given its significant short interest. In conclusion, I find myself adopting a neutral stance on this company's prospects.
