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Catching a Falling Financial Knife

The Secret to Apple's Patent Wars

Companies / Tech Stocks Jun 04, 2012 - 08:33 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleDavid Zeiler writes: In a single stroke, Apple Inc. (Nasdaq: AAPL) could gain the upper hand in its seemingly endless patent wars with Samsung Electronics (PINK: SSNLF) and others.

Or the tech giant could blow its chance and wind up paying billions of dollars in licensing fees.


The outcome hinges on how Apple deals with a little-known company based in Sweden.

This micro-cap just happened to file a patent for the "swipe-to-unlock" touchscreen gesture in 2002 - three years before Apple filed its patent.

The company, Neonode (Nasdaq: NEON), received its U.S. patent in January.

Neonode holds a number of touchscreen-related patents that could become decisive in several of Apple's mobile computing patent cases.

Already the "swipe-to-unlock" patent helped Samsung defeat Apple in a recent patent case in the Netherlands. Samsung said the patent, as well as a phone Neonode released in 2005, represented "prior art."

"Apple just shot itself in the foot and all the blood is going to go to NEON," Jim Altucher, managing director of Formula Capital and well-known investor, wrote in a blog post Tuesday evening.

Insiders told The Wall Street Journal in April that Samsung plans to use the Neonode patent in a similar but much more crucial case in San Jose, CA, scheduled for a July trial.

And Altucher added a scarier prospect for Apple.

If Neonode does indeed hold the patent trump card for "swipe-to-unlock," it could gun for a cut of Apple's profits by filing its own patent case.

Should Apple be forced to fork over licensing fees to Neonode, it could cost the Cupertino, CA, company billions of dollars a year.

So far all this sounds like a big mess for AAPL and a big opportunity for its patent war rivals. Not just Samsung, but also for such titans as Google Inc. (Nasdaq: GOOG) and Microsoft Corp. (Nasdaq: MSFT).

Yet if Apple acts boldly, it could gain a crucial advantage on its mobile computing competitors.

How Apple Can Win the Patent Wars
What could Apple do? Well, it could consider a licensing agreement with Neonode.

Neonode's head of IP, Yossi Shain, told TechCrunch in February it was seeking licensing deals for the "swipe-to-unlock" patent and planned to contact Apple.

But the truth is such a deal would be of limited benefit to Apple. Neonode's business model is to make non-exclusive licensing agreements for its technology, so Android device makers would have equal access to the same patents.

Without exclusive control of those key patents, many of Apple's patent cases would crumble. That's what happened in the Netherlands.

So Apple needs to buy Neonode, and the sooner the better. Not only would that avoid the need to pay Neonode, it would strengthen Apple's hand in the patent wars.

Apple can easily afford NEON, even at a steep premium. Neonode stock currently trades at about $6 with a market cap just under $200 million.

And because Neonode is based outside the U.S., Apple could use some of its $74 billion in foreign-based cash to pay for it. With that kind of money, Apple could pay 10 times Neonode's valuation - about $2 billion - and hardly miss it.

In any event, buying NEON would almost certainly be cheaper than paying it licensing fees.

But most importantly, Apple needs to buy Neonode to prevent its rivals from snatching those key patents. Microsoft, Google and Samsung - each well-heeled in its own right -- would love to have them.

"One of these companies is going to have to buy NEON to get a hold of the original patents," Altucher wrote. "Not only did NEON patent the swipe-to-unlock but they patented many of the touch-sense technologies we use on tablet devices."

What the Neonode Patents Mean For Investors
For investors, the Neonode situation raises a caution flag on Apple. Should Google or Samsung snap up Neonode, the balance of power in the patent wars will shift away from Apple in a major way.

It's hard to predict just how much harm that would do to Apple's business. But the company uses those touchscreen patents in its iPad, iPhone and iPod Touch products, which together generate more than three-fourths of Apple's revenue.

Far more interesting is what this development means for tiny Neonode.

In his blog post, Altucher contends that Apple's dire position relative to the Neonode patents is "more than enough to drive NEON to $30."

Not surprisingly, Altucher's post pushed the stock up 28% in Wednesday trading.

But an acquisition is not all NEON has going for it. Neonode already has e-reader patent licensing deals with such companies as Amazon.com (Nasdaq: AMZN), Sony Corp. (NYSE: SNE) and Barnes & Noble Inc. (NYSE: BKS).

And in April Neonode announced 17 design wins where the company helped customers integrate its technology with their products. Altucher suspects some of these undisclosed products may include household appliances and auto touch panels.

Earnings for the March quarter were a mixed bag. Revenue rose 100%, while the cost of that revenue rose 61% and Neonode posted a loss of 5 cents a share.

But guidance was positive, with the company forecasting revenue of $18 million-$20 million. Revenue for the March quarter was $1.2 million.

While Neonode's prospects look tempting, particularly if it can execute, investors should note that its small market cap and low float do make it more risky and volatile.

In addition, NEON only just started trading on the NASDAQ May 1; before that it was an OTC stock. It's also worth noting that Neonode's phone-making arm declared bankruptcy in 2008.

Nevertheless, Altucher, who owns Neonode stock, accentuated the positive in his piece.

"A competitive technology can always be developed, but NEON has the significant advantage of having patents, clients in every sector, and having been through the multi-year cycles to get these design wins," he wrote.

Source :http://moneymorning.com/2012/06/04/apples-nasdaq-aapl-patent-wars-this-little-known-swedish-company-is-the-key/

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