10/2/2019
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`RPX Corporation: Huge Growth Potential And Competitive Advantages At A Discounted Price - RPX Corporation (NASDAQ:RPXC) | See…
`
`Long Ideas | Services
`RPX Corporation: Huge Growth Potential And Competitive Advantages
`At A Discounted Price
`
`Feb. 10, 2015 7:47 PM ET14 comments
`by: Michael Liu
`Summary
`
`RPX's business revolves around buying patents from businesses and then licensing
`them out to companies that desire to use the technology protected by those patents.
`
`It is one of the only players in this patent-licensing industry, and has two distinctive
`competitive advantages, namely its alignment with customer desires and the
`network effect.
`
`The company has demonstrated an impressive ability to grow over the past few
`years by growing revenues at a CAGR of over 20%.
`
`RPX's industry is massively under-served, and the company could easily capture a
`large portion of the market before competitors.
`
`The share price is also currently being discounted due to short-term worries over
`drops in subscription revenues amplified by end-year tax-loss selling.
`
`What is RPX?
`
`RPX Corporation (NASDAQ:RPXC) specializes in helping companies avoid patent-related
`lawsuits. Over 2500 companies are sued for over $13 billion a year in patent infringement
`lawsuits. The initiators of these lawsuits are often non-practicing entities (NPEs). NPEs
`acquire patents for the sole purpose of suing other companies when they attempt to
`develop products based on those patents. They do not make any products based on the
`patents that they own.
`
`RPX helps to lessen the amount of these patent infringement lawsuits by buying patents
`from NPEs and then licensing them out to companies that desire to use the technologies
`guarded by the patents. RPX makes money off of the annual subscription fees that
`companies pay it in order to use its patented technologies. This subscription fee can range
`from anywhere between $85,000 and $7 million a year.
`
`https://seekingalpha.com/article/2904756-rpx-corporation-huge-growth-potential-and-competitive-advantages-at-a-discounted-price
`
`1/6
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1056, page 1
`
`

`

`RPX Corporation: Huge Growth Potential And Competitive Advantages At A Discounted Price - RPX Corporation (NASDAQ:RPXC) | See…
`10/2/2019
`RPX is a relatively small company with a market cap of ~$650 million. RPX IPOed in 2011
`at a price of $19 per share. To-date, it is down 30% to $12 a share, far from a stellar
`performance. What is impressive about the company is its revenue growth. This is shown
`in the chart below:
`
`RPXC Revenue (Quarterly) data by YCharts
`
`RPX has achieved a consistent 3-year CAGR of 20%, and is showing no signs of
`stopping. This CAGR is not including RPX's first public year, whose 100% revenue growth
`is near impossible to replicate.
`
`Furthermore, the company was able to add an average of 8.8 licensing customers every
`quarter since its IPO (investor presentation, slide 27). This number is also expanding at a
`consistent rate, and should continue into the future as RPX continues to acquire patents
`that are needed by more and more companies.
`
`Undervalued Opportunity
`
`RPX's share price has been steadily declining for the past half-year. This downtrend was
`due to investor worries about the company's first-ever drop in subscription revenue. This
`was predicted in Q2 2014 guidance, and came true in Q3 results. Management attributed
`this drop to a unprecedented concentrated drop in mobile customers. However, on
`Tuesday, February 10th, RPX reported Q4 2014 earnings. Subscription revenue rose from
`
`https://seekingalpha.com/article/2904756-rpx-corporation-huge-growth-potential-and-competitive-advantages-at-a-discounted-price
`
`2/6
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1056, page 2
`
`

`

`RPX Corporation: Huge Growth Potential And Competitive Advantages At A Discounted Price - RPX Corporation (NASDAQ:RPXC) | See…
`10/2/2019
`the 3rd quarter, and was above guidance. Management also projected subscription
`revenues to increase again next quarter. This shows that the drop in Q3 was a one-time
`event that will likely not have any meaningful impact on the company in the long term.
`
`The drop caused by this subscription revenue decline is a major overreaction and a
`buying opportunity. RPX's market cap has declined over 30% because of this one-time
`issue that has already been corrected. Management also seems to think the company is
`undervalued, as they just approved a $75 million buyback program, good for 11% of
`current shares outstanding.
`
`The most likely reason for this overreaction could be that the company's IPO investors
`always begin to sell once the company nears its IPO price. As shown by the below chart,
`RPX's stock has found major long-term resistance at $18 levels, just shy of its $19 IPO
`price, showing that investors are still feeling burnt from the disappointing IPO and want to
`get out of the company.
`
`RPXC data by YCharts
`
`The overreaction could have also been amplified by year-end tax-loss selling.
`
`Neither of these reasons are legitimate justifications for the company's decline, especially
`as the problem of dropping subscription revenues has already been shown as a one-time
`event.
`
`https://seekingalpha.com/article/2904756-rpx-corporation-huge-growth-potential-and-competitive-advantages-at-a-discounted-price
`
`3/6
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1056, page 3
`
`

`

`RPX Corporation: Huge Growth Potential And Competitive Advantages At A Discounted Price - RPX Corporation (NASDAQ:RPXC) | See…
`10/2/2019
`RPX's current price puts it at a forward P/E ratio of just 12. This is an absurd valuation for
`the growth potential of the company, which will now be discussed.
`
`Growth Potential
`
`As was stated in the beginning of the article, almost $13 billion was spent on NPE
`litigation issues in 2013.
`
`Source: RPX Investor Presentation, Slide 5
`
`This litigation cost has also been rapidly expanding over the past few years. RPX has the
`prime potential to capture the growth of this multi-billion dollar industry, as it is the largest
`player in the industry.
`
`The company is taking many initiatives to secure market share in the industry. One of
`these is amassing a huge patent portfolio. Just recently, the company announced the
`purchase of $900 million worth of 4000 patents from Rockstar Consortium. These patents
`cover a wide range of products in the smartphone industry, and their licensing by RPX
`should both give the company a huge new revenue stream and help to alleviate the huge
`amount of lawsuits in the mobile industry between industry giants such as Apple
`(NASDAQ:AAPL) and Samsung (OTC:SSNLF).
`
`RPX currently has 195 clients, and is adding close to 30 new clients every year. Many of
`the company's clients are huge multi-billion dollar corporations that develop dozens of new
`products yearly and require hundreds of patents. And as RPX's customer base continues
`
`https://seekingalpha.com/article/2904756-rpx-corporation-huge-growth-potential-and-competitive-advantages-at-a-discounted-price
`
`4/6
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1056, page 4
`
`

`

`RPX Corporation: Huge Growth Potential And Competitive Advantages At A Discounted Price - RPX Corporation (NASDAQ:RPXC) | See…
`10/2/2019
`to grow, revenues should follow.
`
`Competitive Advantage
`
`RPX has two competitive advantages that put it leaps and bounds ahead of competitors.
`The first is its alignment with clients' desires. RPX's main competitor, Acacia
`(NASDAQ:ACTG), acts as an NPE, in that its earnings are derived from lawsuits against
`other companies for the violation of the patents that it owns. Acacia also licenses its
`patents out to other companies, like RPX. However, Acacia's suing gives it a bad name in
`its industry, which causes companies to avoid the company, and also makes earnings very
`volatile. This is nothing like RPX, whose earnings grow steadily in accordance to its
`licensing deals, and which is widely respected in the patent protection industry.
`
`RPX is also a prime beneficiary of the "network effect." This network effect basically works
`by fueling growth by growth. In RPX's case, this means that as the company acquires
`more customers and earns more money, it can buy more patents and acquire even more
`customers from those patents, which gives it more money to buy more patents, and so
`on... So, as the company grows larger and earns more money, its growth potential
`increases as well. This competitive advantage allows RPX to continuously grow as long as
`it has a customer base, and is inherent to the investment thesis.
`
`Going Forward
`
`Going forward, I believe that RPX should continue to occupy the leading position in the
`patent licensing industry. This industry is immensely under-served, and RPX could easily
`take advantage of that by building up its patent portfolio and issuing licensing deals
`quickly, thus further strengthening its industry position and growing its valuation for
`shareholders.
`
`This, however, would be a long-term move, and requires patience from shareholders. If
`RPX is able to hold the dominant industry position when the patent licensing industry
`matures, the company could be multiples of its current value. However, it may also take 5-
`10 years for this to occur. The short term for RPX is incredibly unpredictable, especially
`since it's a small cap stock with very little analyst coverage. Investors must look no further
`than the recent 25% decline due to investor worries about one quarter of bad earnings to
`see this short-term volatility in play.
`
`Conclusion
`
`https://seekingalpha.com/article/2904756-rpx-corporation-huge-growth-potential-and-competitive-advantages-at-a-discounted-price
`
`5/6
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1056, page 5
`
`

`

`RPX Corporation: Huge Growth Potential And Competitive Advantages At A Discounted Price - RPX Corporation (NASDAQ:RPXC) | See…
`10/2/2019
`RPX is a strong company that is currently being undervalued by the market because of
`short-term drops in subscription revenue and year-end tax-loss selling. Investors should
`take this as an opportunity to buy shares in this strong company. RPX has two distinctive
`competitive advantages, namely its alignment with customer desires, as well as the
`network effect. These competitive advantages ensure that the company will retain its
`place at the top of the patent litigation industry. Also, the total addressable market for RPX
`is huge, under-served, and growing. RPX has demonstrated its ability to grow in the past
`few years by more than tripling revenues. All of this adds up to a very investable company
`for both long-term investors seeking a solid growth story and short-term traders looking to
`profit off the current levels of radical undervaluation.
`
`Disclosure: The author is long RPXC. The author wrote this article themselves, and it expresses their own opinions.
`The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship
`with any company whose stock is mentioned in this article.
`
`Comments (14)
`
`https://seekingalpha.com/article/2904756-rpx-corporation-huge-growth-potential-and-competitive-advantages-at-a-discounted-price
`
`6/6
`
`8150731
`Great company and looking to purchase. Also note they have 300 million in cash and just announced a buy back!
`What do you think of all the insiders constantly selling?
`
`12 Feb 2015, 12:00 AM
`
`IPR2015-01046
`Mangrove Partners Master Fund Ltd. & Apple Inc. v. VirnetX Inc.
`IPR2015-01047
`Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp IP, LLC v. VirnetX Inc.
`Exhibit 1056, page 6
`
`