Vringo Patent case: Bubble or long term growth stock?

Ever since James Altucher’s March 31^st , 2012 article entitled “Why Google might be going to $0” published in techcrunch.com, the speculative investment community has been abuzz with the promise of a 10X bagger.  Indeed, the common stock of VRNG has risen more than 10% since this article hit the newswires, even in the face of recent dilution by the company. Even more impressive, VRNG is up a stunning 276% YTD, and appears to be in a solid consolidating phase before another substantial move. As we’ll discuss later, we believe the next leg with be an upwards movement, and it will be rather dramatic in nature.

If you are not familiar with the claim against Google et al, here it is in a nutshell:

Vringo claims that Google et al. are willfully infringe on patents the company owns regarding ad sorting based on click-throughs. To date, Google has raked in approximately a whopping $67 billion in revenues from ads that certainly appear to make use of Vringo’s patents. As such, Vringo is claiming they are owed triple damages for willful infringement starting from a date of September 15^th, 2005.

For more detailed summaries of the case, please see the various Seeking Alpha articles, as well as the original Altucher article. Our purpose with this post is solely to discuss potential investing strategies regarding VRNG, not the merits of its pending patent case. The merits of the case have been discussed at length elsewhere.

Not discussed at length, however, is how investors can capture an upward movement in the common shares of VRNG.  For reasons we will make apparent, we firmly believe an upward movement is imminent in VRNG.

One of the most important filings in this case has been surprisingly one of the least mentioned in articles by other authors. Specifically, the Rule 16(b) Scheduling Order filed February 15, 2012 has rarely been referenced, with the glaring exception of the pending trial date of October 16^th, 2012. While the trial date is certainly an important event investors should keep in mind, this filing contains several other pearls that have not been farmed for their significance. In particular, we believe three key dates hold tremendous significance for common shares of VRNG:

1.      September 11^th, 2012 – Final date for completion of DISCOVERY and depositions taken by witnesses as evidence in lieu of appearance of the witness at trial.

2.       September 28^th, 2012 – Attorney’s Conference to discuss pretrial disclosure.

3.       October 5^th, 2012 – Final Pre-trial conference

The recent upholding of the favorable Markman ruling for Vringo has backed Google et al. into a legal corner. With triple damages at stake on its core business, it would be foolhardy for Google to risk a trial. Based on our reading of the filings posted on Justia thus far, it’s our opinion that Google’s only viable defensive strategy would be to attempt to confuse a jury with technical jargon and verbose arguments; i.e., muddy the waters enough that the jury can’t tell what’s what and rules in favor of the defendants out of an abundance of caution. That’s a hard legal scenario to see unfolding for a case that strikes at the heart of Google’s business.

As such, we believe these three dates will give substantial upward momentum to VRNG as speculators move into the stock, hoping for a massive settlement. Namely, these three dates will give all parties involved a formal opportunity and a strict timeframe to adhere to come to a settlement. With the Judge already essentially ruling in favor of Vringo twice in the Markman ruling, the writing for a settlement is on the wall, and Google will likely be pressured by the Judge not to waste the court’s time with a lengthy trial. If you are not ingratiated to the US legal system, Judges often do try to force the cessation of a case in the interest of cleaning up their jam packed dockets. Essentially, the Judge becomes an arbitrator of sorts and forces the issue to a timely conclusion.

These dates will thus provide a golden opportunity to capture movement in the stock, and offers a couple of intriguing ways to play it. First, VRNG can likely be used as a pure momentum play heading into the September-October timeframe. To do so, it is our opinion that investors should take a position well before the September 11^th, 2012 Discovery completion. Indeed, if Google knows it will not go to trial and VRNG is willing to settle for less than max pain, this case may come to a hasty conclusion around this date. While there is no way to know how much momentum will accompany VRNG going into this timeframe, it is easy to envision a quick rise into the $5 range based on recent movements surrounding speculative events (e.g., release of potential damages).

Next, we suggest that investors may want to consider holding a core position to capture any monumental move in VRNG. Even so, we caution that this is a very risky strategy. For example, VRNG may win the case, but shareholders may realize little in terms of increased PPS, despite holding through a binary event. Specifically, Google may settle for considerably less than VRNG long’s are hoping for (e.g., $200M). A reasonable and logical legal strategy for Google is to push the case close to trial solely to attempt to limit damages. On the eve of trial, for instance, it is wholly conceivable that Google may offer VRNG $300-500M to see if they blink. Investors need to remember that a trial is risky for VRNG as well. If they lose, they get $0; so a sure $300M may be too much to turn down, but that will likely do little to increase PPS past the speculative bubble.

 Given the variety of unknowns with the pending patent case, it is our opinion that call options are an excellent way to build a core position in VRNG while limiting downside risk. While it is unlikely, there is a slight risk that the trial may be rescheduled. Therefore, we believe the February 13^th, 2013 calls remove the risk of a delay in the trial, and further gives the market time to value the recent Nokia patent acquisitions.

In summary, it is our opinion that VRNG is primed to take another leg upwards, and could be a healthy momentum play in the short term and/or a viable growth stock in the long term, pending the outcome of the patent case.

Disclosure: Enhydris Private Equity, Inc. is long VRNG.

Disclaimer: Enhydris Private Equity, Inc. @blogspot is a publication of general circulation under SEC v. Lowe, and does not act as investment advice in any way, shape or form. Enhydris does not advocate the purchase or sale of any security or investment for any specific individual.