CFA Society Singapore
SINGAPORE (Aug 18): Creative Technology, the company that was famous for its Sound Blaster sound cards more than 20 years ago, had quite an eventful week.
On Aug 16, the company was awarded $36 million in damages from a lawsuit brought against Huawei Technologies Co. The following day, shares in Creative surged as much as 19% to $1.25, before ending the day at $1.19.
Why did the stock react that way? For starters, $36 million is quite a significant amount of money compared to Creative’s market capitalisation of $83.7 million as at Thursday, or $74 million just before the judgement was announced.
Moreover, the company is already loaded with cash. As at June 30, it had cash and cash equivalents of US$75.3 million ($102 million) and no bank debt. Add the $36 million in damages and that figure would inflate to $138 million, or $1.96 a share.
Since FY2016, the company has received some 81 US cents a share in damages from its patent infringement lawsuits. And, there could well be more on the way.
The big question is whether Creative can continue doing this.
Clearly, to keep suing other companies for patent infringement, it has to keep investing in new patents. However, its spending on R&D appears to have fallen over the years. The company spent US$15.3 million on R&D in FY2016, compared with US$66.4 million in FY2011.
Meanwhile, Creative is not generating much operational earnings. In fact, it has been booking losses for years: Its revenue of US$84.6 million for FY2016 is half that for FY2013.
Still, with its stock trading well below the value of the cash it has on its books, and with possibly further damages from ongoing lawsuits coming in, Creative could be a very interesting company to watch in the months ahead.
To get this story and other interesting investing ideas, get your copy of The Edge Singapore (Issue No. 793, Aug 18).