Our top stock pick this month conservatively has 100% upside potential.
I will clearly break down every part of the equation I used to come to that conclusion.
Coming up…
I am super excited to share our research with you today.
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net worth, one video at a time.
And one of the ways we do that for ourselves and our clients is through careful individual
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I first have to disclose that, as of this recording, we are long this stock.
That is to say, we own shares in this company.
I own it in my own portfolio and we hold it in most of our clients' portfolios as well.
The information I share with you in this video should not be taken as a recommendation that
you buy shares yourself - I do not know your personal situation and if this particular
stock would make sense for you specifically.
As you know from this video I don't want to you to invest based solely on any idea
- I am simply presenting you with our research as a good place for you to kick off your own.
As long as we're on the same page there, let's jump into that stock...
Finjan Holdings, FNJN, is a cybersecurity company.
It provides intellectual property licensing and enforcement services in the United States
and internationally.
Most importantly for my case here, the company owns a large portfolio of patents related
to software and hardware technologies in this cybersecurity space.
The company currently has a market capitalization around $80MM.
It has no long-term debt and the board just approved a $10MM stock repurchase program
(which can be a great catalyst for increasing the value of individual shares).
For more than a decade they have been helping major companies, including Microsoft and McAfee,
with their cybersecurity concerns by licensing them their technology.
Over this time they have brought in more than $350MM in contracted licensing fees.
More recently, as other cybersecurity firms have started to pop up, the company has discovered
several cases where their patents have been infringed upon.
So they've also been seeing settlement fees come in from defending those patents.
Now that you understand a little about the company, let's get to that valuation...
Even using pretty simple math and extremely conservative figures, it's not hard to find
DEEP value here…
We'll start with their balance sheet.
Their total assets are worth $97MM.
Total liabilities, $37MM.
So their net assets are worth roughly $60MM.
There are slightly over 30MM diluted shares outstanding.
So that means, from their net assets alone, you can attribute roughly $2 to each share.
As of this recording, the stock is trading just under $3 per share.
Even if you want to be conservative and you decide that you don't want to use net assets,
that you'd rather just take their current (liquid) assets and then subtract all their
liabilities, you still find quite a bit of value.
Their current assets (which are 96% cash, by the way) total about $84MM.
Again, their liabilities, all of them (not just current), total $37MM.
If you used those current assets to cover every single outstanding liability, you would
still be left with $47MM, or roughly $1.56 per share.
Now, we could take that number and consider just one more big factor and already have
a clear picture that this stock is currently pretty significantly undervalued.
Specifically, let's determine a value for their projected revenue streams over the next
4 years.
They are currently working with 20+ licensees.
Remember, it's from roughly that same number of licensees that they have brought in over
$350MM in the past.
So management has some experience in understanding the value of these contracts.
But they also now have a suite of patent-infringement lawsuits.
These litigation catalysts total hundreds of millions in potential settlement fees.
Management says it expects $200-400MM in revenue over the next four years from the current
lawsuits and its licensing pipeline.
Keep in mind that is only including current litigation.
With Finjan owning so many patents in this space they regularly discover infringement.
For example, they filed a new complaint in March against Carbon Black (which has already
settled) and then again in May against Check Point.
And it certainly looks like they are in a position to win or favorably settle most of
these cases.
But as always, let's be conservative and discount managements low-end estimate.
So, $200MM at a 15% discount is $170MM.
Divided over the 30MM shares, that's $5.67 per share.
But that's not all going to come in tomorrow.
So let's evenly distribute that revenue across the next four years (obviously it won't
pay out exactly like that, but that's not an unreasonable assumption to determine a
fair value today).
And now let's discount each of those years by 10% back to today, to get a present value.
When we do that, we're left with a discounted cash flow value of $4.49 per share.
And for conservatism's sake, let's stop there, let's ignore any terminal value,
in other words, Finjan makes money over the next four years and then has absolutely no
value whatsoever, which obviously wouldn't be the case, their patents would still be
in place and they could still be offering value.
But, from our valuation perspective, that'll just be a bonus for now—we don't even
need it to see that there is a more than 100% upside here.
Now, remember our conservative $1.56 from before?
That's the conservative net asset value per share because we just used the current
(the more liquid) assets.
Meaning, in this calculation, we still aren't assigning ANY value to over $12MM worth of
assets, or more than another $0.40 per share.
But, as you may have picked up already, I like to err on the conservative side, so we'll
tuck that over here with the terminal value and just use the $1.56 per share.
Added to the conservative discounted cash flows over the next four years of $4.49 and
we now have a present-day discounted fair value of slightly more than $6 per share.
With all this, I think there's a pretty solid case (if I may say so myself) for a
conservative, over-100% upside.
The biggest concern I have, as an investor, is with their revenue.
Admittedly, although they've brought in over $350MM over the last decade plus, it's
been inconsistent from year to year and in some years they've just burned through money
(likely the reason for the current depressed valuation).
And the longer these lawsuits take to settle, the more downward pressure this stock will
likely experience.
So investors should recognize that these litigation catalysts could come at any time—it may
take a while before the market finally realizes this company's true value.
I'd love to hear from you.
What do you think about Finjan's current valuation?
Let's continue this conversation in the comments.
If you're looking for on-going analysis and updates from us and our research, check
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I hope this has been helpful for you.
Again, this is not meant to be specific investment advice - I encourage you to do your own research.
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I wish you all the best.
Take care.
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