Rational Patent (NASDAQ: RPXC) is a fast growing company in a niche industry: patent defense. Companies such as Google (NASDAQ: GOOG), Samsung, Cisco, Sony, Nokia, and Verizon have all turned to RPX for patent management solutions. According to RPX’s prospectus:
“The core of our solution is defensive patent aggregation, in which we acquire patent assets that are being or may be asserted against our current and prospective clients. We then license these assets to our clients to protect them from potential patent infringement assertions” (62, Prospectus).
In simple terms, there has been an arms race for patents over the past decade. For example, Google recently bought Motorola for $12.5 billion in order to acquire its 14,600 patents and 6,700 potential patents. Google believes that these patents from Motorola will help Google continue its success in the Android phone market. Unfortunately for Google (but fortunately for RPX), managing a portfolio of patents is a time-consuming and complicated business. Instead of wasting internal resources on patent defense, Google has wisely chosen to hire RPX. To refer to the excerpt above, RPX continuously monitors the patent market and acquires patents that it feels will protect its clients.
RPX is the top-dog in this new market and does not face significant competition from other companies in the Patent Defense industry. According to its prospectus, RPX listed its main competitors as internal patent risk management departments within companies. For example, RPX competed with Google’s internal patent defense department to acquire Google's patent management business. I believe that the need for patent management solutions will become so great that companies will move away from managing patents internally and outsource business to companies such as RPX.
Quantitative Analysis
Below I have provided a table from Fidelity.com highlighting RPX’s growth.
Key figures for me include revenue, earnings, and capital spending growth. In RPX’s case, these numbers are all extremely good. Revenue has increased 88% compared to last year, earnings have increased 96%, and RPX has continuously re-invested in itself through its 82% capital spending growth over the last five years. It’s important to note that RPX spends its money on acquiring more and more patents on behalf of its clients.
Perhaps even more important is RPX’s high level of profitability. I have provided another table from Fidelity.com for your reference.
With a gross margin of over 70% and operating margin over 32%, it is safe to say that RPX is highly profitable. My favorite one-two punch is growth and profitability. Whenever a company is able to grow at a fast pace and maintain profits, it usually results in great return on investment for shareholders. RPX’s share-price has been increasing as of late, and actually shot up 12% today on an announcement that Alcatel-Lucent will liscense its portfolio of over 29,000 patents to RPX. According to Reuters.com, Alcatel-Lucent is basically allowing RPX to sell its patents to various companies such as Google and Intel. Proceeds from the patent sales are estimated at $1 billion dollars. Much of this money will of course go to Alcatel-Lucent, but RPX will surely charge a middle-man fee. In addition, RPX will use this as an opportunity to protect its own clients such as Google and Nokia. In other words, if RPX feels that Google could benefit from Alcatel-Lucent's patents, it will purchase these patents on behalf of Google. RPX is starting to develop a strong network of clients in the patent industry that will serve as a barrier to entry for other companies trying to compete with RPX. It appears that now is the perfect time to jump in and invest in RPX; it has all the signs of a winner.
Michael R. Caligiuri does not own a position in Rational Patent and will not initiate a position within the next 48 hours.
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