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Opting For Options With Virnetx (VHC)

 December 21, 2012 09:37 AM

(By Rich Bieglmeier) VirnetX (VHC) saw its twits rise more than 900% on Thursday as a Texas judge ordered Apple (AAPL) to "to provide updated sales data for certain accused and unaccused products, including the iPhone 5 by January 15, 2013."

VirnetX is fresh off a legal, patent victory against the smartphone and tablet giant. In early November shares of VHC jumped from $26.29 to $33.61, close-to-close, when a jury awarded VirnetX $368.2 million in a previous patent suit with Apple.

Thursday's motion was related to a second suit filed by VHC against Apple. On November 9, 2012, the company filed a complaint that includes allegations of "willful patent infringement regarding four patents owned by VirnetX, U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151. In its complaint, VirnetX seeks both damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers. Due to their release dates, these products were not included in the previous lawsuit that concluded with a Jury verdict on November 6, 2012."

[Related -Fusion-IO, Inc. (FIO): Can Fusion-IO Q2 Results Cheer Street?]

Cowen & Company analyst, Matthew Hoffman thinks the judge will "award VHC an ongoing royalty for still-infringing products." He values VirnetX patent portfolio at $2.7-$3.5B, and thinks the stock could gain up to 70% in the next year.

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

Using Hoffman's lowest figure of $2.7 billion, VHC shares could increase 59.7%, and at the upper end of his range, shares would trade for $68.31 at one times the patent portfolio's value.

For VirnetX to come close to reaching Hoffman's target, the 4G LTE security company will have to win plenty lawsuits to value their patent portfolio fully. At the moment, the technology stock trades at 4,418.30 times sales. iStock is not sure that we have ever seen a stock trade at 4,000 times sales before today.

For 2013, Wall Street targets $32 million in revenue and losses of a penny per share for the year. Meanwhile, the company's current – current – market cap is $1.69 billion. Whew, that's rich.

iStock need not look any further into VirnetX (VHC). The stock is way too expensive for our taste. Investors who want a piece of the action, should the tech company fulfill Matthew Hoffman's potential price projection, might consider suing options to play along. The January 2014 35 call options last traded for $7.40 on Thursday. Based on the stock's reaction following the jury's award versus Apple in round one, the options should be in-the-money it VHC is awarded more money in round two.

January 2014 also gives investors the 12 month window Hoffman thinks is necessary for VHC shares to meet their patent portfolio value, with only a fraction of the price risk of owning the inflated stock outright.



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