Monday, 11 April 2016

Rovi plummet: more evidence of knee-jerk expertise?

Stock values are no joke --
unless you ignore the data
The interface between stock prices and patent activity was highlighted again at the beginning of this month. Writing for Bloomberg, Michaela Ross ("Rovi Plummets Following Patent Lawsuit Against Comcast", here) reported thus:
"Rovi Corp., one of the largest owners of patents for digital entertainment devices, plunged the most in five months after the company sued Comcast Corp. following failed efforts to renew a licensing contract.

The shares fell as much 19 percent to $16.61, the biggest intraday drop since Oct. 29, 2015, and were trading at $17.92 at 11:58 a.m. in New York Friday" [nb when this blogpost went live, Nasdaq quoted the Rovi stock price at $17.50].
This weblog has commented on patent-related share price fluctuations before, suggesting that they may be based on over-reactions caused by paying insufficient attention -- or no attention at all -- to the underlying realities of the patent position.  Earlier posts have looked at falls in Apple and Microsoft stock (here) and Nokia (here), while acknowledging that the impact of court decisions on share values can be influenced by other factors too (here).

Was the Rovi share price dive the result of irrational interpretation of the strength of Rovi's patent portfolio or its business plan for commercialising these rights?  Before answering this question, it is worth looking at a few facts.

Rovi owns over 1,500 patent families and has forecast revenue in the range of between $490m to $520m for 2016. The company is no pauper (it holds $324m cash) and also benefits from some recent deals: licensing agreements have been renewed on a multi-year basis with Sony and for seven years with AT&T. It has also agreed standstill agreements with Dish Network/Echostar (buying the parties time to negotiate new licences). The sudden drop in Rovi shares that was precipitated by the commencement of proceedings against Comcast only means that the parties were unable to agree patent licence terms. The fact that litigation has been commenced does not mean for a second that Comcast will not pay; it is merely a prelude to an endgame that will establish how much the giant media multinational eventually pays. There's an analogy here with last December's global patent licence agreement between Ericsson and Apple, where too the object of the exercise was not victory through litigation but securing the best terms for the resulting licence.

Rovi's share price recovered from their initial 19% slump to a new price that was 13.9% down on the pre-announcement valuation -- but there is nothing in the real world to suggest that Comcast's business added up to even 13.9% of Rovi’s value.  And it's not as if Rovi didn’t see this coming: their quarterly results stated that income from Comcast was not included in their figures.

Bearing this in mind, it is difficult to reject the contention that what we have seen here is another example of knee-jerk reflex pricing, not rational assessment of IP risk and value.

Tomorrow we look more closely at data relating Rovi's patent activity and we contrast its position with Comcast. What will this teach us about the valuation of Rovi's stock?

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