Geopolitical Tensions And Legal Disputes Will Erode Future Stability

Key Takeaways

• Geopolitical tensions and legal disputes may disrupt revenue growth and introduce earnings uncertainties.
  
• Absence of inorganic growth strategies and licensing delays could limit diversification and hinder revenue and margin improvements.
  
• Strategic licensing agreements and strong financial health position InterDigital for stable growth, increased market share, and potential innovation in emerging technologies.

Catalysts

Operates as a global research and development company focuses on wireless, visual, artificial intelligence (AI), and related technologies.

• There is concern over geopolitical tensions impacting the company’s ability to engage with certain clients and regions, potentially affecting revenue growth in the future.
  
• Risks associated with ongoing litigation or arbitration, like the Disney litigation and Samsung arbitration, could impact financial outcomes and drive uncertainties in earnings.
  
• The expected dilution from the convertible notes might affect earnings per share (EPS) as shareholders could experience dilution over time if these convert to shares.
  
• The lack of major inorganic growth opportunities or strategies could limit the revenue diversification needed against potential market saturation in existing segments.
  
• Delays in achieving anticipated license agreements with major companies may hinder the expected revenue and net margin improvements envisioned in the company’s guidance for the following years.

InterDigital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming InterDigital's revenue will decrease by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 48.1% today to 26.7% in 3 years time.
• Analysts expect earnings to reach $159.9 million (and earnings per share of $7.3) by about May 2028, down from $392.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.4x on those 2028 earnings, up from 14.2x today. This future PE is greater than the current PE for the US Software industry at 33.3x.
• Analysts expect the number of shares outstanding to grow by 2.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.85%, as per the Simply Wall St company report.

InterDigital Future Earnings Per Share Growth

Risks

• InterDigital has signed new major licensing agreements with Vivo and HP, significantly increasing its annual recurring revenue. This is likely to positively impact revenue growth and stability, suggesting a well-established framework for sustained income.
  
• With over 90% of revenue coming from long-term fixed fee agreements, InterDigital has built a stable financial foundation that supports consistent cash flow and financial planning, potentially mitigating risks of revenue fluctuations.
  
• The successful renewal of major licenses with Apple and Samsung, alongside agreements with top Chinese smartphone vendors, strengthens InterDigital's revenue pipeline, increasing its share of the smartphone market from 50% to 80%, supporting positive revenue and market share outcomes.
  
• InterDigital boasts a strong track record of returning capital to shareholders, with a 50% increase in dividends since Q3 of last year, indicating robust cash flow and strong financial health that may bolster investor confidence and net margins.
  
• Ongoing involvement in foundational 6G technology and recognition in areas like wireless, video, and AI suggest significant potential for future growth and innovation, potentially impacting long-term revenue and earnings positively.

Valuation

• The analysts have a consensus price target of $220.427 for InterDigital 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 $241.0, and the most bearish reporting a price target of just $195.71.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $597.9 million, earnings will come to $159.9 million, and it would be trading on a PE ratio of 48.4x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $214.33, the analyst price target of $220.43 is 2.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.