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Investors Could Be Undervaluing Vringo (VRNG) At The Moment

 November 07, 2012 03:45 PM


(By Rich Bieglmeier) Investors could be undervaluing Vringo's (VRNG) legal victory. Perhaps they are focused on the $30,496,155 award the jury gave to VRNG based on past infringement. However, going forward, Google's AdWord business could be big business for VRNG.

The jury found Vringo is entitled to a "running royalty," which should be 3.5%for the next three years. Vringo's legal team is still working its way through the ruling and will provide an update soon.

In the courtroom, Vringo argued that a royalty base attributable to Google's infringement was to calculate 20.9% of Google's U.S. AdWords revenue, then apply a 3.5% running royalty rate to that base.

[Related -U.S. Veto On Apple (AAPl) Ban Can Hurt Patent Holding Companies]

To back-fill a little, roughly 97% of Google's revenues come from AdWords, and approximately 50% of the 97% is U.S. based. In 2013, analysts expect the search giant to earn $51.82 and to grow by at least 10% for the next 3-5 years.

OK, let's break out the calculator, once again, and do some math. Using a 10% growth rate, which could be conservative, here are some projections for Google's revenue through 2015.

Est Revenue*Est Adwords Revenue*Est US AdWords Revenue*
2013$51.82$50.27$25.13
2014$57.00$55.29$27.65
2015$62.70$60.82$30.41
Total:$171.52$166.38$83.19
*in Billions

[Related -Is Vringo, Inc. (VRNG) About To Make An Insider A Three Time Winner?]

As you can see, roughly $83.19 billion in future revenue could be subjected to a running royalty fee. Using Vringo's 20.9% figure that they offered to the jury, that's $17.39 billion at a 3.5% royalty rate, or $608 million dollars, add in the $30,496,155 award, and the total is roughly $640 million.

If our interpretation is correct, then Wall Street and investors could be undervaluing Vringo (VRNG) at the moment. Using 58.25 million shares outstanding, although the figure seems to be a moving target, it works out to $10.98 per share in running royalties in the next three years.

We will continue to update the story as more information becomes available.

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