It’s like the Stansberry folks know what appeals to your friendly neighborhood Stock Gumshoe… and they just can’t get enough of our coverage. Every time I turn around lately they’re teasing and promoting a different kind of “royalty” company.
And I loves me some royalties.
Royalty companies are pretty well understood by most investors — they’re generally passive firms that own a technology, patent, piece of land, trademark or something else of unique value, and they get paid by someone else who uses it. It could be a drug that the original developer keeps a 1% sales royalty on, or a gold mine that a financier helped to build and in return got a 2% net smelter return royalty, a patent that a chip designer gets a few cents for each time a microchip is sold with that design, a trademark owner who gets paid a few cents each time a hamburger is sold under their brand name… you get the idea. These companies are most common in natural resources, where land-based royalties are common (ie, if we can drill on your ranch you get a 10% cut of the oil profits), but they exist in many industries in varying forms.
And the Stansberry folks, over the years, have probably pushed this idea more aggressively than anyone else — often comparing them to book royalties in saying that you could profit from the “secret” that fattened the bank accounts of the Obamas, the Clintons or the Bushes. We even looked at a different “Next Great Royalty Company” that was teased by Dan Ferris a few weeks ago (Ferris edits Extreme Value, another Stansberry newsletter).
But this time, the tease is from Dr. David Eifrig, who runs Stansberry’s Retirement Millionaire letter — his letter is often full of discount-hunting strategies and unconventional ideas that I’d call “money-making hobbies” (he may be best known to Gumshoe readers for his “five magic words” spiel about how to get “free” silver from your bank), but he does also make investment recommendations… and this time he’s got his own “next great royalty business.”
He would, of course, prefer that you sign up for his Retirement Millionaire and get his special report on the next great royalty… but in enticing you to subscribe, and in making it sound real and exciting, he throws out enough clues that we can ID the stock for you for a better price (more free-ish, as we like to say). Then you can relax, take your time giving it a look-see, and then decide without any pressure whether it’s a stock you like… or even whether you want to subscribe to his newsletter. Heck, maybe you’ll love it — but don’t subscribe just to learn this “secret.” It won’t be secret for long.
Here’s how Eifrig teases us about this idea:
“Every time the royalty ‘business model’ crosses over into a new industry, early investors have a chance to lock in astonishing gains…
“And it’s happening in one VERY exciting industry, if you move quickly…
“You don’t have to be a songwriter… an author… a celebrity… or even do any real work to profit from royalties…Are you getting our free Daily Update
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“You don’t have to own any land or natural resources either… which is exactly why the opportunity I want to tell you about is so original.
“You see, from time to time… the royalty ‘business model’ crosses over into new markets and becomes available to everyday people like you and me.
“And history has shown that investors who recognize these opportunities early on can make an absolute fortune.”
Sounds exciting, no? He compares it to past successful royalty investments with star power and cachet, like the Mills Music Trust (MMTRS) that owns the copyright on thousands of old songs (mostly hits from the 20s and 30s, though the biggest earners are a couple Christmas songs) and earns royalties on them that are passed through to unitholders (Paul McCartney was the largest shareholder of the trust, don’t know if he still is — it’s still publicly held, though almost never trades these days and distributions were low for a while due to a dispute with EMI), and to the big windfall payments being earned by landowners who sit above the oil and gas riches in the Marcellus Shale and similar areas. And he mentions other big publicly traded companies that resource investors are very aware of, like Franco-Nevada (FNV) and Royal Gold (RGLD) — royalty companies that have also been teased dozens of times by newsletters, including Eifrig’s Stansberry colleague Matt Badiali just a few weeks ago when he pitched them as “gold banks.”
So what is this next royalty opportunity? Apparently, it’s part of a huge market:
“Now, the royalty business model has crossed over into another market—one that’s more valuable that the music and gold mining industries COMBINED.
“For instance, over half of all Americans (58% to be exact) own this industry’s product. In fact, nearly one-third of Americans say they cannot live without it.
“22% of the world’s population own one.
“Altogether, this market grossed more than $337 BILLION in 2013… and is projected to grow to $442 BILLION in four years.”
Sounds like a big deal, no? Don’t worry, he doesn’t leave us to guess what the market is, he provides some more clues:
“The industry I’m talking about is the highly lucrative global smartphone market….
“What if I told you I’ve found a company that gets paid a huge royalty virtually every time a smartphone gets sold anywhere on the planet?
“And it doesn’t matter what brand of phone… iPhones… Blackberries… Samsung Galaxies… Samsung Notes… you name it.
“You see, this company owns one of the most vital and important technological components in the smartphone industry…
“I’m talking about the industry’s best ‘data’ technology.”
OK, so that means some of you out there in Gumshoe Land undoubtedly have a quick guess. Hold onto it for a second, you’re probably right but we’re going to see the puzzle through to the end to make sure.
“Without this firm’s technology, phones could not ‘connect’ to the internet and access information—and they wouldn’t be able to get to the all-important data!
“This company makes the tiny ‘modems’ that smartphones need to connect to the internet. It takes special technology for a phone to ‘get online’ and this company makes that technology.
“And, there is different technology to get on networks with different speeds. The first one was ‘3G’, which was the standard when smartphones were introduced with the iPhone.
“The latest developments are ‘4G’ or ‘LTE’—which are faster networks…. And those special modems are also made by this company.
“So ANY time a company uses their patented technology, they have to pay a royalty to this company.”
Finally, a few more clues just to make sure we’re on the right track:
“Royalty revenue increased from $705 million in 2000 to over $7.5 billion today.
“That’s an increase of over 960%!
“And remember, the first real smartphone (the iPhone) wasn’t released until 2007—and that’s when data (and this technology) really took off.
“That made royalty revenue shoot up 33% in one year.
“And it’s gone up 177% since the iPhone came out.
“Don Clark of the Wall Street Journal notes that when anyone makes a 3G cellphone, it is a certainty they will pay patent royalties to this company.
“And Barron’s says this company’s ‘technology can no longer be avoided’ in smartphones.”
And they have apparently been around for a while:
“…the company has been making money from royalties starting in the early 90’s.
“Back then, it collected (and still does) royalties from technology from ‘early generation’ cell phones. In fact, that’s when it had its first ‘royalty surge.'”
We’re also told that this company pays a dividend, and has for a long time — so who is Eifrig teasing?
This is, says the Mighty Mighty Thinkolator, Qualcomm (QCOM).
And yes, if you’re easily surprised than it might generate “astonishing” gains in the years to come as smartphone sales continue to grow. And it is, in part, a royalty company… but it’s also, as you probably know, huge and well-established. QCOM is a $140 billion company and has for many years been the leader of the wireless phone chip market and has always made a substantial portion of their sales from licensing (“royalties” on their chip designs), so this is not a “new” entrant to the royalty “business model” and I think it’s a biiiiiig stretch to say you’re getting in on “the ground floor” … though I suppose, having been founded in the 1980s, it’s newer than some.
Qualcomm reorganized itself a couple years ago, with the patent portfolio and licensing business retaining the Qualcomm name and their chipmaking business and other products and services businesses, which are much larger (as a group) but less profitable, being separated into the wholly owned subsidiary called Qualcomm Technologies. I can’t quite figure out why they did this, it seems very unlikely they would actually split the business into two publicly traded entities, but maybe this makes it easier to protect the licensing and royalties business if it’s more formally separate from their real operating businesses. The whole shebang continues to be wholly owned by Qualcomm and trade with the QCOM ticker.
QCOM is a very solid and profitable company. They earn hugely profitable royalty revenue from use of their 3G and 4G LTE patented technologies, which are ubiquitous but not completely without competition, and their own chipsets that combine processors and radios/modems (mostly under the Snapdragon name) are growing in popularity as well in the “system on a chip” market for next generation smartphones. That line from Barron’s about companies not being able to “avoid” using Qualcomm and paying royalties is from a 2012 article, but it’s still more or less true. (The Wall Street Journal bit about royalties being a certainty for 3G phones was quite a bit older, from 2009, you can see that here).
Partly because of competing technologies in next generation “4G” wireless networks, Qualcomm seems to earn a bit less in royalties per phone each year, but it doesn’t necessarily matter because there are so many phones being sold and the top line keeps increasing every year — and the revenue per phone is very meaningful (more on that from a pretty good Trefis piece here — Trefis is also expecting QCOM growth to come in the second half this year per this earnings preview). Margins have occasionally been called into question, too, as they sell more chipsets relative to the amount of higher-margin licensing revenue (actually designing and building and selling something is more expensive than just collecting license revenue from other companies), but that trend has never turned out to be nearly as bad as critics feared when it comes to actually pressuring earnings. They’ve been growing revenue at a mid-single-digit percentage rate, and growing earnings at a low-double-digit pace (in the last quarter, it was 4% revenue growth and about 10% earnings growth), so they are not shooting the lights out with nosebleed growth rates… but this is a $140 billion company that buys back a lot of stock, pays a rapidly growing dividend (now just over 2%), and has an almost unassailable market position. And it trades at a reasonable valuation given the generally kinda expensive nature of the market these days, about 14X next year’s earnings (20X last year’s earnings).
So no, you won’t find me trying to talk you out of buying Qualcomm. It’s a great company, they have spent decades building a stranglehold on mobile telecom that they won’t easily give up, and it’s not terribly expensive. The stock is near its 52-week high, as are many of the “big, cheap tech” names like Intel, Google, Apple, HP, IBM, Cisco, Microsoft, etc., and it’s a better company with more clearly solid growth prospects than many of those thanks to the fact that essentially the whole company is locked in to the continuing and expanding smartphone revolution as their profit driver (I own Apple, Google and a wee slice of Intel, and I’d buy Qualcomm before buying any of the others).
Of course, they also report earnings on Wednesday this week … so there could easily be some kind of surprise in either direction that moves the stock by as much as 5% or so (the stock has been relatively steady this year, and they provide pretty clear guidance, so it would be a real surprise if it moved a lot more than that), but this is a mega cap company in a mega market — not the kind of thing you generally have to make snap decisions about. So take your time, give QCOM a good look, and come on back and let your fellow Gumshoe readers know if you think it’s a good stock for your portfolio — it’s not really an “early” buy into a royalty company and it’s probably not going to make you rich in a few months (or a few years), but they are dependent on royalties for much of their profits and we are, perhaps, still fairly early in the global adoption of 4G smartphones. I’ve looked at it many times and don’t personally own it for a variety of reasons, mostly because it hasn’t often been so cheap that you’d call it a ridiculous “must buy” and I’ve missed it the few times that has happened, but maybe I’ll get another chance to buy someday. We’ll see.