Legal Action Against Disney Will Create Future Licensing Opportunities

Key Takeaways

• Legal actions against Disney and others may yield unforeseen revenue, impacting future growth forecasts positively.
  
• Strong pipeline and strategic M&A activities bolster long-term revenue growth through renewed licensing and hybrid bonding opportunities.
  
• Legal risks, reliance on large deals, declining Pay-TV, increasing expenses, and competition threaten Adeia's revenue stability, market position, and profitability.

Catalysts

Operates as a media and semiconductor intellectual property licensing company in the United States, Canada, Asia, Europe, the Middle East, and internationally.

• Adeia’s initiation of patent infringement litigation against Disney and related streaming platforms could result in a positive legal or settlement outcome, potentially leading to additional revenues not previously accounted for in their 2024 guidance. This impacts potential revenue growth.
  
• The robust pipeline of new opportunities, particularly in key verticals such as OTT, semiconductor, and e-commerce, suggests future deal closures that could drive revenue growth. This is evidenced by existing discussions reaching the final stages and recent agreements such as the one with Neiman Marcus, impacting future revenue.
  
• Adeia's focus on high-quality, organically developed intellectual property, combined with strategic M&A to augment its portfolio, supports its ability to renew and acquire new licenses, impacting long-term revenue growth and maintaining a strong renewal rate, which currently exceeds 90%.
  
• Accelerated debt repayments, improved interest rates following a successful debt repricing, and a $200 million share repurchase program enhance financial flexibility, potentially improving net margins and EPS by lowering interest expense and shares outstanding.
  
• Ongoing advancements and expected adoption of hybrid bonding in semiconductor markets present significant revenue growth opportunities, with new innovations and collaborations expected to capitalize on the slowing of Moore’s Law, impacting long-term revenue.

Adeia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Adeia's revenue will grow by 13.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.0% today to 67.5% in 3 years time.
• Analysts expect earnings to reach $342.6 million (and earnings per share of $2.94) by about January 2028, up from $41.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.9x on those 2028 earnings, down from 34.7x today. This future PE is lower than the current PE for the US Software industry at 43.6x.
• Analysts expect the number of shares outstanding to grow by 2.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Adeia Future Earnings Per Share Growth

Risks

• The patent infringement litigation against Disney could pose financial risks, particularly involving legal costs, potential counter-claims, or prolonged negotiations, which might impact profitability and net margins.
  
• Adeia’s reliance on signing large deals for significant revenue could lead to financial volatility if negotiations are delayed or fail, affecting revenue forecasts and earnings predictability.
  
• The ongoing decline in traditional Pay-TV subscribers could affect revenue streams if not sufficiently offset by the growth in OTT and other new markets, potentially impacting revenue stability.
  
• Increased selling, general, and administrative expenses due to higher personnel costs and sales efforts could pressure net margins if not matched by proportional revenue growth.
  
• Potential competition and technological advancements in sectors like OTT and semiconductors may challenge Adeia's ability to maintain its market position and profitability, possibly impacting long-term revenue growth.

Valuation

• The analysts have a consensus price target of $16.33 for Adeia based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $507.3 million, earnings will come to $342.6 million, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 7.8%.
• Given the current share price of $13.1, the analyst's price target of $16.33 is 19.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.