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After having traded sideways for 4 years, InterDigital’s (NASDAQ:IDCC) stock price has increased by 50% over the last 12 months. Has the stock finally found its inflection point, and will its strong momentum continue, or is it, instead, more likely to trade sideways again for another 4 years? Let’s investigate.
The reason behind the recent stock price surge
For a long time, I found it quite startling that IDCC stock traded sideways, as the results from 2019 on have been really strong. Revenue has grown spectacularly every single year since 2019, concluding a weaker period (revenue halved between 2016 and 2019 because InterDigital had received a strong one-off payment for so-called ‘past royalties’ from Apple and Huawei).
After receiving the large one-off payments in 2016, the stock price skyrocketed to above 100$ – which seemed fair as EPS was 8.95$. However, in the years to come, EPS would drop to 0.66$ in 2019. Since, IDCC’s recurring revenues have been increasing at a rapid clip, making the company and its profits less dependent on these one-off payments:
Q4 earnings report 2020
For example, in 2020, total recurring revenue was $336M, while non-recurring revenue consisted of only $22M. As stated, the level of recurring revenue further increased over 2021-2023. In 2022, recurring revenue already accounted for $404M, or 20% more than in 2020.
Q4 23 earnings report
Ironically, in 2023, recurring revenues did not increase all that much.
Instead, InterDigital once again received very large one-off catch-up payments:
Q4 earnings presentation
As such, seemingly, just as in 2016 and 2017, the recent increase in the stock price has, at least to some extent, been driven by these catch-up payments!
What now?
Keeping the history since 2016 in mind, investors should be careful in valuing the company based on 2023’s EPS. If they were to do so, the stock would look very cheap, trading at 14x (EPS: 7.62$). Normalized earnings would be much closer to those of 2022, when the catch-up payments were in line with the historical average. Based on the EPS of that year, IDCC is trading at 34x earnings.
However.
With that caution in mind, IDCC just announced that it has struck a magnificent new deal with Samsung, which allows the Korean conglomerate to use IDCC’s codec for video formatting in its TVs. Samsung will pay in Q1 24 no less than $160M in catch-up payments. This exceeds the catch-up payments for the full year of 2023!
Moreover, IDCC also expects recurring revenue to increase throughout 2024. It has guided for a total revenue for the fiscal year between 620 and 670 million dollars. Excluding Samsung’s catch-up payment, that leaves us with 460-510 million dollars in revenue. If that number includes another $50M in catch-up payments, which was the total for fiscal year 2022, recurring revenue is guided to be 410M-460M dollars. This equals a guided expected increase of 1-10% this year (and IDCC tends to beat, or at least meet the upper end of its guidance ranges).
Conclusion
IDCC has over the years increased its recurring revenue. The stock price, however, seemingly mostly reacts to the one-off catch-up payments which happen from time to time. Buying the stock right after the company has pocketed these large payments, has proven to be a great strategy. But one has to be quick. Buying the stock the fiscal year after after the firm had received these payments, proved to be a terrible strategy.
2023 was such a year: the company has received large one-off payments again, and the stock price is on the rise. As such, one needs to be cautious. However, IDCC just reported that it has received an even larger one-off payment this quarter from Samsung. As such, revenue and EPS are likely to hit all-time highs this year. I believe, therefore, that investors are still in time to lift on the recent strong momentum.
