Joff Wild

RPX shares climbed by close to 9% yesterday following an upgrade from Barclays Capital, which announced it was moving them from a 2-EW rating to a 1-OW rating. Explaining its decision in a briefing paper, the bank’s equity research team stated:

… in our view, the underlying IP sector is one of secular sustainable growth, and we don’t believe there have been material changes in industry drivers that should warrant lower valuations. Recent industry checks, positive meetings with management, and our analysis of key data supporting underlying growth drivers (rising NPE litigation activity, patent asset acquisition prices remaining relatively constant) lead us to be increasingly constructive, particularly at recent valuations. We continue to believe RPXC is well positioned to further grow its membership base and comfortably sustain solid revenue growth over the next few years at a 20%+ rate (with incremental margin expansion given the scalability of the model), which we think is well more than what is priced into shares.

The vote of confidence comes after a difficult few months for RPX stock. It was first traded on Nasdaq on 4th May 2011 at $19 and within hours climbed to over $23. That began a very strong bull run, which saw the stock’s value peak at $31.41, giving the defensive patent aggregator a market capitalisation well in excess of $1 billion. Since last summer, however, there has been a sharp downward trend – at one stage recently, the price hit a low of just $11.05. At close of trading yesterday (Tuesday) RPX shares stood at $13.75, giving the firm a market cap of $674.22 million.

While some have questioned the long-term viability of the RPX business model, Barclays Capital has few doubts. It believes that shares are likely to rise to about $17, but could go as high as $22. “While we recognize some modest risk from members potentially not renewing their memberships (with RPXC currently well above its long-term renewal rate of 90%), we believe fundamental drivers behind our revenue and EPS estimates are conservative and not priced into shares at current levels,” the briefing paper states. The paper also raises the possibility of new revenue streams deriving from RPX’s proprietary databases and the analytics these enable. I think that these could be key, as could the fact that in and of itself the growing RPX portfolio of rights – combined with the relationships the firm has created over its relatively short history – gives it a strong degree of flexibility. IP rights, databases and analytics in the hands of people who know the patent and technology markets inside out are a very powerful proposition and should lead to a sustainable, profitable future.