I love to find asymmetric risk/reward scenarios in the market.
You can do that with a small company which has the ability to unlock a large payday – and I believe I have found one with Augme Technologies Inc. (OTC: AUGT ).
To understand the value of mobile marketing company Augme, first we have to look at what Yahoo! Inc. (Nasdaq: YHOO) has done to Facebook.
Ripples shot through the technology space last week when Yahoo launched an all-out patent assault against Facebook.
Yahoo is demanding billions in licensing fees for the use of its technologies.
Yahoo has asserted claims on patents that include the technical mechanisms in Facebook's ads, privacy controls, newsfeed and messaging service.
In simple terms, Yahoo is getting ready to try and bring Facebook to its knees through legal means.
"Yahoo has a responsibility to its shareholders, employees and other stakeholders to protect its intellectual property," a Yahoo spokesman said in an e-mailed statement. "We must insist that Facebook either enter into a licensing agreement or we will be compelled to move forward unilaterally to protect our rights."
Should Yahoo sue Facebook, it would mark the first major legal battle among technology giants in the social media sphere.
Yahoo's patent claims come hot on the heels of Facebook's IPO announcement to raise money that would roughly give them a $100 billion valuation.
This lawsuit threat can only have Facebook's management, its bankers and lawyers rushing to secure some sort of defensive arsenal to fight off this and other pending attacks.
While this battle has captured everyone's attention, what I find more interesting is Yahoo's seemingly blatant hypocrisy.
Yahoo appears to be throwing rocks from its glass house at the neighbors by wanting to make others pay for the unauthorized use of its patented technology.
What Yahoo is seemingly trying to ignore is that it, too, has been accused of the same type of intellectual property theft – and the accuser is Augme Technologies.
Augme Technologies vs. Yahoo
In November 2009, New York-based Augme, which provides mobile marketing technologies and services, sued Yahoo in federal court in San Francisco. Augme accused the Sunnyvale, CA-based Internet company of infringing on patents related to webpage functionality which enables targeting ads to end-users.
Two specific patents are in dispute , with potential damages estimated by some to be as high as $1-$2 billion absent potential treble damages. The suit could render Yahoo's own online advertising platform materially compromised.
Thus far, things haven't gone Yahoo's way. It lost its request for summary judgment, appears to have fared poorly in the Markman ruling , lost its request to protect its code for its entire ad system and lost its request to seal at least one hearing from the public.
Despite Yahoo's best efforts, a jury trial was recently set for January 2013 .
With Augme's suit against Yahoo, and Yahoo's aggressive attack on Facebook, I think Augme could soon find itself at the epicenter of what is setting up to be a classic clash of the titans.
The situation begs the question: what happens if Facebook moves to acquire Augme?
Augme Technologies: The Savior in the Yahoo vs. Facebook Fight
Facebook acquiring Augme and its patents would allow them to literally step directly into Augme's shoes in the currently pending litigation against Yahoo.
Facebook also could use Augme's patent portfolio to fend off the growing list of others that have filed suits against the social media behemoth.
In addition to its patents, Augme also boasts the Hipcricket mobile marketing arm, which it acquired in August 2011. Hipcricket was named "Mobile Service Provider of the Year" by Mobile Marketer in 2011.
Business research firm Frost & Sullivan said in 2011 that Hipcricket "has emerged as the preferred provider of high-impact mobile marketing solutions in the United States," and that "its recent acquisition by Augme Technologies is expected to further consolidate the company's position as an industry powerhouse."
Augme announced earlier this week it expects to report revenue of approximately $5.1 million for the fourth quarter of fiscal 2012 ended Feb. 29, 2012. That's a 15% gain from the previous quarter. The dollar value of contracts signed during the fourth quarter totaled approximately $6.5 million, a 23% rise from the previous quarter's $5.3 million.
The value of mobile marketers is increasing, which has triggered some merger and acquisition activity in the sector. Just this week, fellow mobile industry leader Amobee was acquired by SingTel for $321 million – representing a tremendous premium.
The global mobile ad market is likely to increase to more than $20 billion by 2015, up from about $7 billion this year, according to tech research firm Gartner Inc.
Four analysts have issued "Buy" ratings on Augme, and the top two price targets are $5.75 and $6.00. That means gains of 209% – 223% from Wednesday's closing price.
With exploding revenues, top management, and over 50 Fortune 500 clients, Augme Technologies is a "Buy."
The stock is trading in the lower half of its price range, making it an interesting play on the Yahoo vs. Facebook war and the smartphone revolution. There are also a host of other companies who would significantly benefit from both Augme's growing mobile marketing business as well as its patent portfolio, and could make a move to acquire Augme.
With the stock trading at under $2 relative to its $4.70 high, I'm recommending we use limit orders on this stock. It is highly volatile and serious patience should be exercised in building the position.
Special Note of Disclosure : Jack Barnes has no interest in Augme Technologies (OTC: AUGT ).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, " Confessions of a Macro Contrarian ," and his " Buy, Sell or Hold " column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed SPDR Gold Trust ETF (NYSE: GLD).
News and Related Story Links:
- The New York Times:
Yahoo Warns Facebook of a Potential Patent Fight
- Money Morning News Archive:
Previous "Buy, Sell or Hold" Features
Confessions of a Macro Contrarian.