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. At Spicer Capital, we are dedicated to helping
you build your rapidly-growing, highly-diversified net worth, one video at a time. And one of the ways we do that for ourselves
and our clients is through careful individual stock selection. And I’ll be sharing our top ideas right
here each month, so if you haven’t already, consider subscribing. 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 out our Patreon page – as an Insider that’s
where we answer every single question about the stock and our research and provide any
updates to our portfolio or general expectations – or to a lesser degree, follow @SpicerCapital
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advice – I encourage you to do your own research. …and then, tell us about it! We’ll put out at least one of these micro
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