Patent Suit Play: Speculators Only!

10/23/2002 12:00 am EST

Focus:

Fred Hager

President, Fredhager.com

Investing in the outcome of a pending patent infringement suit is clearly a speculative endeavor. I cannot emphasize enough that this idea is only for those fully aware of the risks. Lawsuits can always go either way and a negative ruling could result in significant losses for those betting on the wrong side. For those willing to incur these risks, Fred Hager (fredhager.com) offers a “special situation” play – Rambus. Here’s his review.

Rambus (RMBS NASDAQ) is an intellectual property company whose business centers on developing solutions for high-speed data communications between individual chips. With the continued push toward semiconductors with incredible processing capabilities, there is a growing need for technologies that make it possible for these chips to rapidly receive and transmit data with nearby chips. Rambus’ technologies, which the company licenses to third-party chip manufacturers in return for licensing fees and royalty payments, are aimed at resolving such bottlenecks. 

“On 10/11/2002, Rambus reported earnings a penny above expectations at six cents per share. This is the fifth quarter in a row with earnings of six cents per share. The balance sheet is still very solid with no debt and total cash and securities of around $1.68 per share. Meanwhile, the company authorized the repurchase of up to five million shares of the stock; this is in addition to the 1.1 million shares that remain authorized for repurchase from the last authorization. The company repurchased 3.9 million shares in fiscal 2002.

“We are currently awaiting a ruling from the US Federal Court of Appeals regarding the Rambus vs. Infineon fraud and patent infringement case. We believe the ruling will favor Rambus more than Infineon, and if so, it could mean a big move in the company's stock price. We are expecting a ruling to be issued before the end of the year (although it could come tomorrow, or next year). Since there is no telling when the court will issue a ruling, and there is no guarantee it will favor Rambus, the assumed risk involved in such an investment is substantial. In preparation for a positive outcome of the lawsuit, we purchased some short-term options in our portfolio. At this point, if we were to buy more options, we might consider February 2003 options, or perhaps the LEAPS.”

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