STRAIGHT PATH COMMUNICATIONS STRP
April 30, 2014 - 2:37pm EST by
hbomb5
2014 2015
Price: 6.15 EPS (0.27) (0.50)
Shares Out. (in M): 14 P/E 0.0x 0.0x
Market Cap (in $M): 86 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT -2 -1
TEV ($): 72 TEV/EBIT 0.0x 0.0x

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  • Wireless
  • Intellectual Property
  • Patents
  • Technology
  • Multi-bagger
  • winner
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Description

Straight Path Communications, which was spun out by IDT in July 2013, has two intangible and potentially  valuable assets. With 250 B MHz/POPS it is the largest holder of licensed spectrum in the US. Now this is mostly 28 and 30 GHz spectrum, which has limited use today. We expect new technology, particularly 5G, and generally short spectrum supply, will make this spectrum more useful and thus more valuable. The company also holds a number of patents that it is prosecuting on a contingency basis.

Estimating a price target for StraightPath is challenging. Our $30 price reflects what we think investors will be willing to a) pay for an option on 5G spectrum in 18 -24 months and, b )give the company credit for its progress in monetizing its spectrum assets. Over a longer horizon with lots of things going right for the company, we think an achievable price is many, many times that. For the time being, we assign no value to the company's patent portfolio.

Spectrum: 
Straight Path holds more than four times the spectrum of Sprint and about eight times the amount held by Verizon or AT&T. Today this spectrum is best used to connect buildings to fiber networks and as back haul for cell sites. We would characterize its liquidation value as about 1/100th of a cent per MHz/POP. This is in sharp contrast to mainstream mobile frequencies which sell for $0.25 to more than $3.00 per MHz/POP. Frequencies are like real estate, location, size, and zoning count. Should Straigt Path stock reflect a spectrum value of even $0.01 per MHz/POP it would be priced at about $177 per share or about 28 times the current price.

 

The path to capturing this valuation is long and technology dependent. Right now economics limit the usefulness of this spectrum to connecting buildings and a limited number of cell sites to transport (fiber) networks. Within the next 3 or 4 years, we expect this high frequency spectrum will be one of several good solutions for connecting small cells to cellular and fiber networks. Small Cell backhaul has the potential to push value prices in urban markets to the $0.01 to $0.05 per MHz/POP. Thinking longer term, 5G expects to use these frequencies for multi-GBps service. Should 5G prove viable, and with the backing of 3GPP we expect it will, we would expect spectrum values to climb further.

In the near term, investors should watch for StraighPath to create spectrum supplier relationships with carriers like Level3, integrators like UNSI/AirBand, and additional equipment providers like the relationship it has with radio maker SAF. Intermediate term progress can be monitored first by carrier deployments and then backhaul contracts. As 5G seems to be in the early phase of a hype cycle it is easy to track its progress in the press. For those more grounded, the 3GPP website is a good resource and will most likely be the most accurate source of information and progress.

Patents 
StraightPath holds 84.5% of a portfolio of 18 patents. Eleven relate to creating voice calls in IP environments. Seven relate to data compression. It is prosecuting these patents on a contingency basis with Hunton & Williams, Mintz & Levin, and Kirkland & Ellis.

We are skeptical about patent value. We had originally guessed the value at between $1.8MM to $4.5MM or $100K to $250K per patent. Given that the company has reached some settlements, which will likely net it between $3.0 and $3.5MM our estimate may be low. This cash is a good augmentation to the company's $14.3 MM in cash as of Jan 31, 2013

In August of 2013, Straight Path filed ITC complaints against LG Electronics, Panasonic, Sharp, Sony, Toshiba, Vizio and AmTran. It also filed US Patent infringement against these companies and Huawei, ZTE, BlackBerry, and Vonage (Vocalocity.) We know the company has reached agreement with Sharp on 3 patents.

Yesterday, the company announced Straight Path dismissed claims against and licensed Sony and Google.  The 8K states that terms are confidential, and that the company has received settlements of $12.3MM before contingent legal expenses.  At this time, we do not know if this changes our $3.0 to $3.5MM estimate. 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

This is a long term story.
In the next year or so look for the company to cut more deals with radio suppliers like the one they have with SAF.  I suspect integrators like UNSI (FKA Airband) would put value on these deals and increase uptake.
The company could cut a deal with or create their own integration company.
More patent settlements -- have to watch the company's cash position and accounting to determine the value of confidential settlements.  
Over 2-3 years.
Look for progress using microwave as backhaul for small cells.  Redundancy from PTMP is a major positive for 39 GHz.
Look for more news from the 5G standards setting body (3GPP) and potentially more demonstrations like Samsung's recent display.  5G plans to provide several hundred to more than 1000 GHz service.  
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