How NVIDIA Corporation May Have Just Lost Billions

Image source: NVIDIA Corporation.

Earlier this month, NVIDIA Corporation and Samsung announced an agreement to settle all pending intellectual property litigation between the two companies, ending a more than year-long legal battle between the two tech giants.

"The settlement includes the licensing of a small number of patents by each company to the other," NVIDIA's press release elaborated, "but no broad cross-licensing patents or other compensation."

That might seem well and good on the surface. But make no mistake: This isnotwhat the folks at NVIDIA wanted to happen. In fact, the graphics chip specialist may be missing out on hundreds of millions -- if not billions -- in potential IP licensing and royalty revenue.

How do I mean? Take NVIDIA's cross-licensing agreement with Intel , for example, under which Intel agreed to pay NVIDIA a total of $1.5 billion in licensing fees over a six-year period starting in 2011. This also means NVIDIA will no longer enjoy those fees from Intel starting next year, forming what Goldman Sachs analyst James Covello described last year as a worrisome "licensing cliff" that, combined with any slowdown of its core gaming graphics card markets, could have painful repercussions on NVIDIA's business.

To be fair, NVIDIA stock has nearly doubled over the past year as of this writing, driven both by its utter dominance of the dedicated graphics card industry (NVIDIA commanded nearly 80% of the entire market at the end of 2015), and by broad strength across its other market verticals. Most recently, last week NVIDIA stock popped as much as 13% after it announcedstrong data center and automotive sales brought overall revenue growth in Q1 2016 to levels well above management's expectations.

But you'll be hard-pressed to find anyone at NVIDIA as pleased about their recent settlement with Samsung.

A timeline to (underwhelming) resolution

Rewind to Sept. 2014, when NVIDIA initiated its first-ever patent infringement lawsuit against Samsung and mobile chip specialist Qualcomm , and simultaneously asked the International Trade Commission to block shipments of the offending products into the United States. According to NVIDIA Executive VP David Shannon at the time, both Samsung and Qualcomm had "chosen to deploy our [intellectual property] without proper compensation to us." In question were the companies' unauthorized use of seven of NVIDIA's 7,000 GPU-related patents, which NVIDIA stated Samsung repeatedly said was "mostly their suppliers' problem."

However, Samsung promptly struck back with a lawsuit of its own. Shannon noted NVIDIA "fully expected we would be sued in response," calling it "a predictable tactic." But Samsung also questionably dragged a small, Virginia-based NVIDIA partner called Velocity Micro into the lawsuit in an apparent attempt to keep the suit in the state, which NVIDIA noted has faster times to trial than most other U.S. jurisdictions. Then, Samsung followed by including in a separate counter suit with the ITC a dozen more small NVIDIA partnersthat, Shannon lamented on NVIDIA's behalf, "have nothing to do with this fight."

Nonetheless, NVIDIA maintained its original assertion that Samsung and Qualcomm should pay up, and expressed optimism the first case to be decided would be its ITC complaint. And all was looking up as late as April 2015, when NVIDIA offered an update with a pretrial decision from the ITC known as a "Markman ruling." Through that ruling, a judge determined claim constructions favorable to NVIDIA would be applied to six out of seven disputed claims when considering Samsung's and Qualcomm's alleged infringement.

Six months later, however, the case took a step backward for NVIDIA after the same judge issued an initial determination that Samsung and Qualcommdidn'tinfringe on two of NVIDIA's patents. He also further stated that while they did infringe on a third NVIDIA patent, that third patent was deemed invalid. NVIDIA naturally disagreed, vowing to ask for the ruling to be reviewed by the full six-commissioner U.S. ITC team and to confirm the previous judgment of the U.S. Patent Office that the third patent was valid. Shannon also remarked that the initial determination was merely "one more step in a long legal process."

Fast-forward to this month's settlement, however, and it becomes obvious that NVIDIA decided somewhere along the line that this "long legal process" either wasn't worth the effort or would ultimately prove unwinnable.

That doesn't mean NVIDIA investors should flee the stock. After all, the settlement had no discernible negative effect on NVIDIA's shares -- something that shouldn't be entirely surprising in light of the broad strength its business has exhibited lately.

As NVIDIA continues to find success in diversifying its revenue streams away from the core gaming market, I'm also confident the company will follow by generating market-beating returns. But as a longtime NVIDIA shareholder myself, I'll admit I'm disappointed with the loss of this potentially massive licensing opportunity.

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Steve Symington owns shares of NVIDIA. The Motley Fool owns shares of and recommends NVIDIAand Qualcomm. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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