First a disclaimer. I am long TSRA at $18 and am among the 88% of institutional investors who own the stock.
Your analysis is all wrong, and you are going to lose a lot of money shorting TSRA.
If the company LOSES ALL of its 4 pieces of current litigation, including $0 from Amkor, the stock is worth $17 per share. See below points (1)-(3).
If they WIN ALL of their litigation and get $100 million from Amkor, stop spending $1/sh per year on litigation expenses, the company will earn north of $3/share annually and stock will go to $60 (20x p/e) when the dust settles.
So -- to summarize, you are short a stock at $19 that is worth $17 WORST CASE and $60 BEST CASE!?!?
That is some really horrible risk/reward -- you might make 11%, or you might lose 315% of your investment. Let's see, that is a 28:1 risk reward. Trust me, you are better off covering your short and walking away. Clearly you do not know what you are doing.
1) TSRA has $5 cash per share ($250 million). No debt.
2) TSRA's optics business is worth $7 per share, present value. This technology (actually 4 technology buckets) is extremely disruptive for handsets. It is new, so not as appreciated by investors yet. But their optics technologies literally replace $5 of semiconductor content with a $.35 cent royalty for up camera optics in cellphones, PDAs, Media players, and more. All of the top 5 handset OEMs love it (I've spoken with all of them), Samsung has already licensed, and the others will all sign licenses within the next 6-12 months. This opportunity is very real and will last a very long time. Conservatively, TSRA will get royalties on 300 million units in 2011 at an avg of $.35 royalty each. Low estimate. That is $100 million in royalty revenue, all of which flows through to the bottom line minus taxes, or $.75/share of annual eps at 25% tax rate. Put a LOW 15x market multiple on that earnings stream and optics is worth $11.25/share in 2011. Discount to today at a typical WACC and optics has a present value of about $7 share.
3) And finally if you take ONLY the value of its current, ironclad, CSP royalty contracts through 2011 or 2012 when the key CSP patents expire, those contracts alone are worth $250 million or $5 per share. Most of those contracts were signed by customers who were former litigation respondents and wound up signing both contracts and statements saying TSRA's patents are valid, etc etc. No way out even if TSRA loses all of its ITC cases. The PTO is irrelevant by the way, even if it overturns all of TSRA's patents, the appeals process will last beyond 2012. Literally impossible for that $250 million in existing contracts to go away even in the worst case scenario.
I don't pretend to know the outcome of its ITC cases. It could be 50% odds of losing or winning each one. Or it could be 10% odds or 90% odds. I am long the stock at $18 because at that price, I'm getting nearly free optionality on $42 of upside.
What I do know is that at $23.50 (today's close), the stock is discounting roughly $6.50 of option value on all 4 pieces of litigation. ($23.50 less $17 for the operating business equals $6.50). With worst case worth $0 and best case worth roughly $60-$17 = $43, it is trivial to show that the smart money is ascribing only 15% odds of success on all of the 4 current litigations. At $19 where you shorted the stock, smart money was ascribing just $2 of optionality, or 5% odds of success with all litigation. So you better be 100% sure they will fail with all 4 pieces of litigation or you won't make money here.
I don't think that the PTO will eventually uphold the patents but:
- it can further delay the reexamination processor, TSRA will file the ALJ's opinion once it gets it
- reexamination doesn't matter anymore. ITC judge said that the patents are valid and enforcable. As far as ITC concerned this is written in stone.
Also don't forget the lobbying of TSRA at both the PTO & ITC. With this ALJ decision they can easily force the PTO to reconsider the reexam decisions. I'm talking about it practically not legally.
Anyway, PTO & reexam doesn't matter anymore in these cases.
A court does not hold a patent to be valid. In fact what a court does is hold that the accused infringer failed to carry its burden of proof by clear and convincing evidence that the patent is invalid. That has no effect on the Patent Office's decision to reject the very same claims as unpatentable, since the Patent Office's burden of proof is by a preponderance of the evidence (a lower standard of proof than that applied in court). Moreover, the Patent Office gives claims their broadest reasonable construction, unlike a court which can construe claims narrowly to uphold their validity. So, don't get your hopes up that the PTO will change its mind and withdraw the rejections based on the "not invalid" finding in court.
Now we have the ITC decision.
Who was 'dead wrong'? :)
Still having that large holding at $18?
I'm sorry for say that but your are the worst fund manager I have ever seen. You should look for another job, obviously the stock market is not for you.
You may follow my picks if you want to make money, it's free :)
To our local idiot - you've been going off for months about how the companies patents are invalid, so guess what? YOU'RE DEAD WRONG. Who the hell would listen to you now? And if Carlos is the worst fund manager you've ever seen, you truly have your head up your a s s.
"Friedman Billings Ramsey analyst Mehdi Hosseini lowered his 2009 earnings forecast for the company, because of expected weak demand and litigation expenses. But he said the market was overreacting to the news, and put a price target of $18 on the stock, based on a "worst-case scenario" of the company losing all its various legal battles. He noted that the company has about $6 per share in cash."
No worries Carlos, you're not the only one.
Thanks for your analysis Carlos. I do not read this board much, but your post was quite helpful. I got into TSRA in a big way on the intraday plundge through $13 to $11. I got in for the same reason apparently you did -- zero or low cost optionality. I did the same calculation as you for your items 1 and 3 and got AT LEAST $10 ps. I added for Amkor a couple of bucks. Being a Rambus investor I already knew PTO reexams were being misunderstood by the market so I loaded up increasing amounts as it dropped to near $11. My breakeven, including a tiny amount I bought long before the final plunge around $22, was about $12 ps. On the rebound to $20 I sold deeply OTM LEAPS to bring my break-even under 10. I estimate I was paid to take the optionality to 50.
Not having before a big position in TSRA, I did not know enough to value the optics component. You make a compelling case for that found money value.
In addition, I am quite optimistic about the ITC cases. I heard from a reliable source that TSRA kicked butt in a recent hearing. The novice judge who first stayed the ITC action because of the PTO action committed clear error, a rookie mistake. If ITC accepted PTO reexam findings to stay cases, ITC might as well close shop. The point is the judge in this case was fooled and made to look foolish by the TSRA opposition attorneys using a seductive but flawed reexam arguement. After being humilated by the Commission's overruling, this judge is not likely to believe TSRA opposition attorneys again.
I have been on the "Street" nearly 30 years,albeit on the 'sell side', and I can tell you are the real thing. Thanks again for sharing your analysis.
FYI on several of the RMBS boards there is a patent attorney who I believe has been hired either by the cartel that Rambus is fighting or a short hedge fund. He spreads partial information about reexams and even has a web site dedicated to biased, partial PTO reexam FUD (Fear, Uncertainity and Doubt). When TSRA was close to $11 he was saying on the RMBS board that the PTO "blew the head off of TSRA". Of course that was the bottom.
1. institutional investors don't post on yahoo chat boards.
2. tsra shows you what happens to stock prices in bear markets.
3. fundamental analysis while not worthless needs constant updating. it may also require info which is not publicly available.
Welcome to the board and thanks for taking the time to share your analysis.... One interesting point you have brought out for me is the expert timing for anticipated revenue replacement created by TSRA management's prior decisions to enter the optics market.... Even with McWilliams sidestep from his primary roll, that's an awfully telling vote of confidence for the present management team's foresight and ability to manage future growth after these patent expirations....
One point I've wondered before that maybe you have a handle on: Do you anticipate the revenues from expiring patents to just completely, 100% disappear upon expiration or are there ways for TSRA to keep them coming in any way afterwards?
TSRA does have a number of other patents (hundreds actually) which are all licensed in a portfolio to all of its customers.
The key CSP patents do expire in 2011-2012, but many of the others extend out past 2020.
So it is also a question of whether TSRA can innovate and develop CSP IP that enables higher performance in higher density chips which are currently not even in production but will certainly have new problems with heat, speed, defects, etc. Samsung is already talking about potential issues ahead on DRAM especially, as solder pitches get smaller while chips get hotter and faster. No one on the planet knows how to package the DRAMs that will be built in 2012...TSRA is working on it is all we know at this point.
I really appreciate your thoughtful comments!
It's always good to see valuable arguments on this forum.
Let me answer your points:
1. "TSRA has $5 cash per share ($250 million). No debt."
2. "TSRA's optics business is worth $7 per share, present value."
I would respectfully disagree. You can't make NPV or WACC calculations on gut feelings or based on discussion with people who 'love the technology'. This is nothing more than speculation, optics is a commodity on a crowded market with established players. TSRA has very low chance to succeed on this market, I'm not saying it's zero but low. Putting $7 guaranteed value to the optics business is pure optimism and not based on any publicly known numbers. In my view the value of the optics business is $0 until we see some revenue coming in. The only thing we know right now is that TSRA pushed back with a few quarter the first projected revenue from this business.
3. "And finally if you take ONLY the value of its current, ironclad, CSP royalty contracts through 2011 or 2012 when the key CSP patents expire, those contracts alone are worth $250 million or $5 per share."
I agree, this is how I calculate it as well.
"The PTO is irrelevant by the way"
I would disagree on that. Rejected patents signifcantly reduce the chances to obtain new clients and victory at ITC. Every litigation or arbitration is based on the patents, with all key patents rejected now in non-final decisions TSRA has a low chance to prevail at ITC in any of the ongoing case. Still, you as a shareholder pay $1-2 per year on litigation expense, I guess you would rather see a dividend like that. The ROI on the current ITC litigation expenses will be very likely 0%. I am also not sure that money collected from Amkor will cover the related litigation expenses at all.
To sum up: in my view the value of the optics business is 0. The company is worth about $10 if all litigation is lost. In the unlikely case of a full victory at ITC and Arbitration probably $40 is possible again. So the range could be 10-40 in my view. I agree that the upside potential is bigger but the odds are not 50-50 at all because of the PTO decisions and the history of the ITC Judge.
There is also an important factor that you are not counting with: in case Amkor gets a big reduction on fees because of the PTO decisions what do you think Intel & Samsung will do? Do you think Intel will just sit tight and see how others are saving 100 millions and it still pays the full licence fee? That is why I think the Amkor decision has a much larger impact on TSRA's business (and the share price as well) than it is presumed by many at the first glance.
'I would respectfully disagree. You can't make NPV or WACC calculations on gut feelings or based on discussion with people who 'love the technology'.'
You've been going on gut feelings and what the PTO says (ie discussions with people who review patents) since the start, why the sudden shift? You continue to ignore the facts, that current revenue streams are unaffected, that royalty obligations of their customers are not tied to any particular patents, and that patents are valid and enforceable during re-exam.
'in case Amkor gets a big reduction on fees because of the PTO decisions what do you think Intel & Samsung will do? '
It hurts me to see people so clueless, it truly does. The PTO decisions are NON FINAL and cant be used in the AMKR decision. Please please please keep thinking like this so I can sell you my shares for $40 or more. Samsung had their day in court already, get over it. Under your theory, if AMKR will be decided based on non-final PTO decisions, then Intel and Samsung can just stop paying NOW, along with all their other licensees. What do you think they're waiting for??? There seem to be some holes in your theory.
'This is nothing more than speculation, optics is a commodity on a crowded market with established players. TSRA has very low chance to succeed on this market, I'm not saying it's zero but low.'
I should remind you that people said the same thing about uBGA back in the old days. TSRA is producing optics technology that is smaller, lighter, cheaper and with increased functionality. They have two major players signed on and more coming. And their statements from last earnings call says a lot:
'On June 30th, we announced our second major OptiML Focus licensee, Samsung. Toshiba was the first, announced in December of last year.... We expect additional OptiML Focus licensees by year-end, and OptiML Focus will be deployed in mainstream wireless handsets in early 2009, according to feedback from our customers.'
'We continue to see strong demand for wafer level chip scale packaging for image sensors, an area where we have 40% market share.... Our first SHELLCASE MVP licensee, Nemotek will come online in the beginning of 2009, and we expect to sign additional SHELLCASE MVP licensees before the end of this year.'
'We are also making excellent progress on our OptiML Wafer Level Camera Technology for wireless handsets. We expect to be in pilot production on our VGA solution in the fourth quarter and be high volume production ready for our licensees by year-end.'
'We are excited about the long-term potential for our Consumer Imaging business, WHICH IS GROWING AT A RATE FASTER THAN OUR BASE BUSINESS. We remain on track for $100 MILLION IN REVENUE for this part of our business by 2010.'
These guys aren't sitting on their hands waiting for legal decisions. They're producing new technology that is in demand, at a significant cost reduction, that is currently being licensed, and has strong revenue growth potential. Manufacturers like lower cost, thats the first question that will come up in any meeting. Getting back to your comments.
We have been reminded of TSRA's value and $27 price target assuming ALL legal decisions go against them. Of course any negative decision will have a short term negative reaction in the share price but if you're looking for $15 again you are late to the party.
You are such a walking contradiction.
You should be short on every tech stock currently available. After all:
1) if the technology is still in development, it has zero value until it makes money (according to you).
2) any existing technology has little value because it will all be outdated when the newly developed technology makes this one obsolete.
You should hate the tech sector with a view like that. I suggest you invest in pork bellies and platinum.
On behalf of all of the rationale posters on this Board, thank you very much for sharing the analysis you have so thoughtfully posted. Your comments validate much of the intuitive reaction held by myself and many others on this Board.
My guess is that Investorpatent will discount your comments by saying the post is only a self serving statement of opinion held by one who holds a long position and "just doesn't understand the importance of the PTO reexamination decisions."
Best wishes for a large profit to you and others who understand the concept of risk/reward.
By the way, Amkor *could* be $0 or it could be as high as $400 million. The decision is being delayed now because all of Amkor's customers are being asked to supply historical unit information -- that is an indication that the 3 judges are counting beans to determine how much TSRA will get for back payments. That is a positive indication that the outcome will favor TSRA over AMKR.
"The decision is being delayed now because all of Amkor's customers are being asked to supply historical unit information -- that is an indication that the 3 judges are counting beans to determine how much TSRA will get for back payments."
I have never said that Amkor will end up paying nothing. My estimation is between $5-20M. They must pay on the few claims that survived the PTO actions so far, no doubt about that.
I think counting bigger numbers takes just as much time as counting smaller numbers except if these three judges still uses an abacus :)
thanks carlos for the detailed analysis of their extraordinary business model. you wont hear anything from investorpatent, he doesn't know how to respond to logic.
except for 'your wrong, and i will be right - look at my BLOG!'
nice weekend everybody