Analyst Hits InterDigital With Underperform Rating: 'Limited LT Growth Catalysts'

Shares of InterDigital Inc IDCC traded lower by 2.8% on Monday morning after one Wall Street analyst said the stock simply has no growth catalysts ahead.

The Analyst: Bank of America analyst Tal Liani initiated coverage of InterDigital with an Underperform rating and $60 price target.

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The Thesis: In the initiation note, Liani said InterDigital is a market leader in wireless, video and AI technology patents and has a robust recurring revenue model. However, he is projecting revenue growth will slow to just 2% in 2022 and 2023 and the company will continue to need to secure new customer deals to keep that growth going.

InterDigital management believes it can grow wireless technologies recurring revenues from its current $375 million annual run rate to around $500 million, reaching 85% market penetration. However, Liani remains skeptical of the long-term opportunities.

"On the negative side, wireless licensing accounts for 90% of revenues and the company’s business model suggests that at 85% penetration, additional revenue upside would be limited, with the bulk of revenue growth potentially slowing to low-single digits, or even flat, in the long term," he said.

From a valuation perspective, Liani said the stock's current forward earnings multiple of around 19 is steep, and he wouldn't be surprised to see that multiple contract as revenue growth slows. Still, he anticipates InterDigital will maintain somewhat of a valuation premium to the peer group average earnings multiple of 14 simply because of the quality of InterDigital's stable recurring revenue model.

Benzinga's Take: It seems as though Liani had a lot of good things to say about InterDigital's high visibility and its solid opportunity in 5G device licensing. However, valuation upside is likely limited if revenue growth slows to a crawl in the next couple of years.