It’s been a few weeks since we had a heated teaser roll in from the Motley Fool, so today we’ll welcome the Foolies back to the fold — this time it’s an ad for their flagship Stock Advisor newsletter edited by Tom and Dave Gardner, and it’s all about profiting from the “Mobile Media Gold Rush” by buying the “Apple core” companies that the iPad, iPhone and Mac giant “can’t live without.”
None of this general argument is new, of course — we’ve heard teases about Apple suppliers and component manufacturers before, with an occasional big winner. And with the recent patent frenzy that has led to lawsuit after lawsuit among PC and phone makers, and the proposed takeover of Motorola Mobility by Google, everyone’s looking at key owners of intellectual property in the mobile computing business. Many of the patents are bogus and pointless, of course, but that doesn’t stop companies from wanting to have “as many patents as the other guy” (if nothing else, so they can effectively counter-sue and make equitable settlements).
And beyond that patent push, of course, we also have the age old “picks and shovels” metaphor — you don’t want to be the guy who goes up the mountain to dig for gold, you want to be the guy at the bottom of the mountain who sells shovels and rents burros, that way you win no matter who ends up dancing on doubloons. If you read exclusively investment newsletters, in fact, you might come to think that there are only two business models in the world: picks and shovels, or razors and blades (the latter, of course, is where you sell or give away a basic machine, like a razor, then profit for decades as folks have to come back to you for the proprietary refills and/or service to keep the machine working, like the disposable blades … also read, “printers and inkjet cartridges”).
So this time around, we’re told about three “Apple core” companies that are suppliers of “pack mules” to Apple or who otherwise own stuff that Apple needs, like patents — so who are they? Let’s look at ‘em one at a time:
“Apple Core #1: A “pack mule” business that produces the essential component used to make lithium ion batteries for smartphones, iPads, and laptops…
“It’s essential to mobile devices because lithium is the lightest metal on earth. And can store three times the energy of most other competing materials…
“And Apple can’t live without it. Plain and simple….
“The little known company featured in the report I want to send you has pricing power and influence over lithium that’s been described as similar to the power OPEC has over oil production. Holy cow!
“Yet, you might be thinking this is a massive company, right? With millions of shares trading hands each day. But it’s not. It’s a thinly traded stock. And I doubt no more than one investor in 100 has heard of it.”
“Like OPEC for lithium?” That means it can only be one company, the fertilizer, iodine, and lithium giant SQM (SQM), whose Salar Brines in the Atacama Desert make them both the world’s largest lithium producer (about a quarter of global lithium comes from SQM) and the lowest cost producer.
And it ain’t a small company — you can argue, I suppose, that it’s relatively unknown and illiquid, but only when compared to giants like BHP Billiton or Potash Corp … SQM does trade only a few hundred thousand shares a day, but that’s far more liquid than many of the small caps we write about, and with a $16 billion market cap it’s certainly at least a “big mid cap” if not a large cap company (everyone’s got a different definition for those terms).
And though SQM is almost always teased because of its dominant position in the lithium production business, that is by far its smallest business segment (albeit, the one that usually grows most quickly) — they just released their first half results, and lithium revenues were about $86 million, compared to $273 million from potassium chloride and potassium sulfate; $211 million from iodine; and $364 million from plant nutrition. SQM is a fertilizer and chemical company that gets about 10% of profits from lithium.
Which ain’t bad, especially if lithium demand really ramps up as many folks expect over the next four years, with most of that ramp-up dependent on projections of steady growth in electric cars that rely on lithium batteries. That’s a business I think we can all agree is growing but still quite speculative, especially if you’re old enough to have been burned before by past electric car dreams (battery powered cars were available for at least 50 years before Spindletop and other discoveries helped make the internal combustion engine cheaper, and before Henry Ford’s Model T rolled off the line, though they faced many of the same relative challenges then as they do now — principally, lack of recharging infrastructure and limited range).
And SQM shares are arguably a bit pricey at the moment because of their unique position in the lithium market as the real dominant market-maker and the fact that everyone knows they’re the “OPEC of Lithium.” At a trailing PE in the low-30s and a forward PE of about 23, SQM is more expensive than lithium near-peers like Rockwood Holdings (ROC) or FMC Corp (FMC), which are generally seen as more economically-sensitive chemical companies or fertilizer near-peers like Agrium (AGU), Mosaic (MOS) or Potash (POT). None of those comparisons are necessarily fair, since SQM has such a strong position in specialty chemicals and such a dominant position in parts of the South American fertilizer market, but I’d argue that there are pretty heavy expectations about lithium baked in to SQM’s price. Rockwood, by the way, is the one that was most aggressively teased a couple years ago as a “top secret” lithium supplier if you’re looking for an alternate company (they’re the only other big operator in the Chilean brines — there are other potential lithium sources in Australia, Bolivia, and the American Southwest, including both other brine operations and mining operations, but I suspect few can compete with the Salar Brines on cost).
And how about another idea?
“Apple Core #2: The little-known company with a massive intellectual property footprint across the mobile communications sector…
“This company doesn’t make cellular handsets. It doesn’t provide telecommunications services. It doesn’t create the software that controls all the features you see on the latest generation mobile devices…
“Instead, the company featured in the exclusive report I want to send you develops and patents the technology on which more than a billion cellular phones, PDAs, and other mobile devices rely…
It’s focusing on solving the problem of an impending bandwidth crunch as the world migrates to wireless communications. And the technology behind their vision of a ‘network of networks’ is breathtaking.
“Right now, as we speak, Apple, Google and Microsoft (three tech giants with, combined over $140 billion in cash on their balance sheets) are fighting to LOCK UP these technologies for themselves…
That’s why on August 15th, Google acquired Motorola Mobility. And Motorola Mobility’s shareholders saw their shares surge over 60% from the deal!
“And we think Apple Core #2 could be the next headline making acquisition — and it could be announced at any moment!”
So they pitch this as an “intellectual property” play, with patents that are more valuable than the market thinks — comparing it to the value of the intellectual property (copyright, in this case) that made Marvel such a great investment for Dave Gardner almost ten years ago. What is it?
Well, that ain’t a lot of clues for the Thinkolator — but we’ve got a good answer, this must be InterDigital (IDCC), which is widely expected to be taken over by one of the biggies like Apple, Qualcomm (QCOM) or Google (GOOG). I don’t know that the company has officially confirmed this or commented on it, but the reason the shares have just about doubled this Summer is that they’re rumored to be holding a behind-the-scenes auction to sell the company in the near future — which isn’t surprising, the company has been a rumored takeover target for a long time, though the heating up of the patent wars that really kicked off with the auction for Nortel’s portfolio (and now the focus moves to Eastman Kodak’s patents) has certainly brought more focus on these assets. IDCC has patents in both wireless telephony (2g, 3g and 4g) and WiFi.
They also have quite a lot of shares sold short (about 30% of the shares according to shortsqueeze.com), not surprising for a stock that’s had a huge run in a short period of time but perhaps unusual for a rumored auction target — unless a bunch of smart folks are either convinced that the auction won’t be as lucrative as IDCC investors are hoping or are just hedging their bets. IDCC is expensive based on valuation, with a trailing PE in the 30s, and revenue is lumpy and doesn’t necessarily go up every quarter … but they do have high margins, since licensing intellectual property is such a nice low-capital-cost business once you’ve got a few valuable patents under your wing.
Clearly, though, the speculation for IDCC bulls is not that earnings will surprise in the next quarter, it’s that Apple, Google and Qualcomm or other big players will get into a heated auction and decide they have to have IDCC’s patents, which would almost mean that the sky’s the limit — that’s the nice thing about potential target companies in technology these days, the big acquirers have so much cash and are earning so little on their cash that it’s easy to imagine the floodgates opening up, particularly for patents at the moment but also for other key niche companies.
Of course, there’s also a potential overhaul of the patent system coming our way from Congress this month, and having a company built on patents means that you live and die by court decisions and by the strength of your legal team, so surprises can have very abrupt impacts on the share price.
If you’re interested in wireless patents, by the way, Christian DeHaemer at Angel Publishing has been recommending another of the rumored takeover targets in this space, VirnetX (VHC), a smaller (and unprofitable) company with patents in 4G wireless security that I know next to nothing about… other than the fact that shares doubled in the first half of the year on takeover speculation, then even more quickly gave up those gains with a near-50% drop in early August. And Louis Basenese from White Cap Research has written about Augme Technologies (AUGT.OB, trades over the counter), a much tinier firm with mobile marketing patents and active lawsuits. Both have been quite volatile, but might be worth researching if you’re digging into the patent space and hoping for takeovers, big licensing deals or court victories to drive up prices.
And we’re hitting the wall here for today — that’s two ideas for you but there is one more “Apple core” company that the Thinkolator didn’t get to this morning. I’ll get that out for you tomorrow. Until then, enjoy … and let us know if you’ve a fave in lithium, or wireless patents, or in anything else that the giant Apple machine is gobbling up.
Full disclosure: I own shares of Apple and Google and have a limit buy order in for additional Apple shares if they hit my target. I do not own any other stocks mentioned above, and will not otherwise trade in any stock mentioned for at least three days.
Personal Capital has great tools for tracking spending (they can cut your spending by 15%), but what I love most is their automated financial dashboard -- it will look at all your assets and debts, tally up your asset allocation, project where you'll be at retirement, and suggest ways to manage risk or improve returns. It's free, I think their free tools are great, and I think it's worth checking out -- you can do so here.