James Altucher threw a grenade at Google (NASDAQ:GOOG) last week. The informative and entertaining financial journalist shed some light on a very precarious situation with a Vringo (AMEX:VRNG) patent which has the potential to destroy currently anticipated future shareholder value at Google. The article has been a huge topic of conversation among traders who seem to have passionate views as to whether Altucher has enlightened the masses or simply lost his mind.
So, I reached out to James to dig deeper and learn how he reached his conclusion Google might go to $0:
James, you said Google might be headed to $0. All catchy titles aside, can you sum up your argument major rationales for those who are lost on your longer explanation?
The key word is “might”. I don’t actually think they will go to zero. But here’s the issue:
A) 97% of their revenues come from AdSense and AdWords.
B) They are in a patent lawsuit on those revenues.
C) If they lose (anything is possible and I provide links in the original article comparing Google’s description of their AdWords algorithm (not their search algorithm) and the patent) then some percentage of their $67 billion in revenues since 2001 and $200 billion in revs expected through 2018 will go to the winner.
D) Triple damages (i explain why they might have willfully infringed on the patent. In a willful infringement its triple damages).
E) The big key: all of their customers (AdSense, white label — AOL, IACI, Target, Gannett are also being sued right now), will be sued. If that happens, who will want to do business with Google? This is the real reason why they might have serious issues. A business ilves and dies by its customers.
OK. Now, you have to know people think that’s a “C’Mon, Man!” Don’t you think Vringo would have built what we now call Google Search if they invented it?
Vringo is merging with I/P. The merger hasn’t concluded yet. My guess is June it concludes. So the real question is: why didn’t I/P build it. I/P, run by Ken Lang, who was CTO of Lycos, bought the patents back from Lycos. Ken spent many years on developing the software and sold it to Lycos. So the real question is: why didn’t Lycos either build this or sue Google:
a. Google was Lycos’s biggest customer.
b. Lycos has been through 5 owners in 5 countries and nobody even knew what they had. They bought dozens of companies and hundreds of patents. Ken, because he knew the software he wrote himself and the patent he wrote himself, was particularly qualified to buy it back from Lycos for cheap. It should be mentioned that Donald Stout must have vetted these patents. He ran NTP and their case against Research in Motion (NASDAQ:RIMM) on patents. They won $612 million. Not a bad result and RIMM is MUCH smaller than Google.
Isn’t there a case to be made that Patent Litigation is the new hot thing in legal land, so we should dismiss this as lawyers looking for new ways to bill hours?
Patent litigation is the old hot thing, not the new thing. Let’s not forget why Google bought Motorola (NYSE:MMI). For the patents! Let’s not forget Google settled with Yahoo/Overture 8 years ago. Because of their patents! Patent litigation has been around forever. Note: I’m not saying patents are good or bad. I’m just talking about an issue that is right now the law that could very seriously effect Google.
If Vringo has a legitimate case, why would they ever settle?
VirnetX Holding Corporation (AMEX:VHC) settled a patent case with Microsoft (NASDAQ:MSFT) for $120 million and now has a $1.2 billion market cap because there will be ongoing royalties, lawsuits, settlements, etc. Almost all patent cases get settled on the court steps. And the company suing will get a multiple in market cap value.
Maybe Microsoft infringes. Who knows? This is why there’s not even incentive for VRNG to sell their company this cheap. There is potentially billions in value on the table. Again, haters gonna hate, but this is what happens in the real world. I’m not saying this is good or bad. It just is.
So, is Google a Buy, Sell, or Hold for you?
I think Google will ultimately settle. I love the Google Glasses idea and the GoogleCars. Google will keep growing and innovating and making $100s of billions. The stock is a long-term buy.
James Altucher is an investor, programmer, author, and entrepreneur. He is Managing Director of Formula Capital and has written 6 books on investing. His latest books are I Was Blind But Now I See and FAQ ME.
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