Revenue Declines Will Challenge Future Profitability Amid Disney Litigation

Key Takeaways

• Pursuing unlicensed smartphone vendors and higher rate renewals could grow revenue but face market limitations and pressure on sustainability.
  
• Litigation and arbitration, including with Disney and Samsung, create revenue uncertainty and potential challenges in new market monetization.
  
• InterDigital's strategic growth through licensing diversification and strong cash flow underpins financial stability, with ambitious targets boosting long-term revenue and profit margins.

Catalysts

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

• InterDigital's pursuit of unlicensed smartphone vendors and efforts to renew existing agreements at higher rates could drive future revenue growth, although the potential market is becoming more limited. This puts pressure on sustaining revenue levels.
  
• The company’s litigation with Disney over intellectual property rights suggests potential challenges in monetizing new markets like video streaming, which could impact revenue forecasts if not resolved favorably.
  
• The competitive and prolonged process of negotiating renewals and new agreements, particularly in international markets, may affect predictable revenue streams and require increased operational expenses, affecting net margins.
  
• InterDigital's ambitious targets of achieving over $1 billion in annual recurring revenue and $600 million in adjusted EBITDA by 2030 signal high expectations for growth, which could lead to overvaluation if market conditions or strategic executions fall short.
  
• The reliance on arbitration outcomes, such as with Samsung, introduces uncertainty into revenue projections, influencing earnings potential if the results do not meet expectations.

InterDigital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming InterDigital's revenue will decrease by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.3% today to 32.9% in 3 years time.
• Analysts expect earnings to reach $243.7 million (and earnings per share of $7.93) by about March 2028, down from $358.6 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 27.0x on those 2028 earnings, up from 16.2x today. This future PE is lower than the current PE for the US Software industry at 29.5x.
• Analysts expect the number of shares outstanding to grow by 1.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

InterDigital Future Earnings Per Share Growth

Risks

• InterDigital delivered the best business results in its history in 2024, with a revenue increase of 140% year-over-year in Q4 and an annual revenue increase of 60% to $869 million, indicating strong earnings potential moving forward.
  
• The company has successfully signed new license agreements with major smartphone manufacturers (e.g., OPPO, ZTE) and continues to renew and expand agreements with top technology companies like Samsung and Google, suggesting sustained growth in revenue from their licensing programs.
  
• InterDigital has diversified revenue streams, with more than 30% of its 2024 revenue from consumer electronics and IoT programs, highlighting its ability to generate income beyond its traditional smartphone base and enhancing net margins.
  
• A strong cash generation of $272 million in operating cash flow for 2024 allows InterDigital to return significant capital to shareholders through share buybacks and dividends, strengthening its financial stability and supporting future earnings.
  
• InterDigital is targeting more than $1 billion in annual recurring revenue and $600 million in adjusted EBITDA by 2030, backed by strategic efforts to grow market share in existing and new sectors, potentially boosting long-term revenue and profit margins.

Valuation

• The analysts have a consensus price target of $195.25 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 $100.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $741.6 million, earnings will come to $243.7 million, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 7.6%.
• Given the current share price of $225.72, the analyst price target of $195.25 is 15.6% lower.
• 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.