Investors as a group prefer innovative companies since they tend to provide higher returns. However, investors must be able to quantify the innovation of a company, and this is difficult to measure. Yet, there is a quick way to do this. In my experience as a patent attorney with 20 years of experience, patents can be used to assess a company’s innovation and reveal value that isn’t shown on the balance sheet. They can be a powerful indicator of a company’s future potential and growth. The development of new products, technologies, and licenses can help companies make a mark and increase their profits.
Importance of IP for Public Companies
Patents are an important aspect of a public company’s intellectual property (IP) portfolio and can play a significant role in a company’s growth and competitiveness. Some of the ways patents can be important for public companies include:
- Creating barriers to entry: Patents can provide a company with exclusive rights to certain products or processes, creating barriers to entry for competitors and helping to maintain market share.
- Generating revenue: Patents can provide a source of revenue for a company through licensing and partnerships, as well as through the sale of products protected by patents.
- Attracting investors: A strong patent portfolio can be a sign of a company’s innovation and R&D efforts, which can be an attractive feature for investors looking for growth opportunities.
- Enhancing the company’s reputation: A strong patent portfolio can enhance a company’s reputation as a leader in its industry and help to establish the company as a reliable and innovative business.
- Providing legal protection: Patents can provide legal protection for a company’s products and processes, enabling the company to take legal action against competitors that may be infringing on their patents.
- Protecting company’s investment: Obtaining patents helps the company to protect its investment in research and development by preventing others from profiting from its innovations.
- Fostering innovation: Patents can provide an incentive for companies to innovate by giving them the opportunity to protect and monetize their inventions.
It’s important to note that a patent portfolio alone does not guarantee success for a public company, but it can be a valuable asset that can be leveraged to help the company compete in the marketplace and generate revenue.
How Stock Analysts Use Patent Information
A stock analyst may review the patent count of a company as part of their analysis of the company’s intellectual property (IP) portfolio. The patent count can provide insight into a company’s innovation and research and development (R&D) efforts, as well as its potential for future growth.
An analyst may look at the number of patents a company has been granted, as well as the types of patents and their potential impact on the company’s business. For example, a company with a large number of patents in a specific technology or industry may be considered to have a competitive advantage in that field.
The analyst may also look at the company’s patent portfolio diversification, as a diversified portfolio with patents in different areas can be a sign of a well-rounded and resilient company.
Moreover, the analyst may also review the company’s patent litigation history, as a high number of patent lawsuits can indicate that the company is aggressively defending its IP or that it may be facing significant competition.
In addition, the analyst may also review the patent expiration dates and whether the company has taken steps to renew or extend its patents. The expiration of a significant number of patents could have a negative impact on the company’s revenue and future growth prospects.
Overall, the patent count can provide valuable insight into a company’s innovation and R&D efforts, as well as its potential for future growth. However, it’s important to note that the patent count should be analyzed in conjunction with other financial and operational metrics in order to have a comprehensive understanding of a company’s performance and potential.
Providing patent information projects an image of innovation and strength. This is why companies announce the issuance of a patent with great fanfare. Some companies go as far as doing a press release on the filing of a patent application.
A negative Example on the lack of patent
To illustrate, we can look at Embark Technology, which is a public company in autonomous driving. The San Francisco-headquartered company, which develops autonomous driving technology for the trucking industry, has presided over a roughly 98% share price decline since going public in late 2021. In late 2022, Embark has lost close to $5 billion of market capitalization.
Today, Embark and a few other companies that have carried out SPAC mergers are among those strange categories of companies trading below their cash reserves. In the case of Embark, the company’s $110 million market capitalization is actually quite lower than the $191million cash it had at Q3. Investors seem to believe it is worth less than zero.
It seems that a combination of factors contributed to the company’s fall. These include an apparent overvaluation at its inception and a sectorwide downturn. A critical report by a frequent short-seller may also have been key. These factors, taken together, have led to billions of dollars in valuation for a company once supported by some of the most prominent names in venture capital.
Embark’s story is a tale of rags to riches followed by SPACs-to rags that has been recurrently playing out in the tech sphere. In the beginning, Embark joined Y-Combinator in 2016 with the initial intention to build self-driving shuttles that can be used on college campuses, but the team soon switched to self-driving trucks and remained focused on highway driving. This was a huge market, and although it was still extremely difficult, it presented an easier problem to solve.
Venture funding was a natural outcome, as it happened with many Y Combinator founder teams. Between 2016 and 2019, Embark raised a $2 million seed round led by Maven Ventures, a $15 million Series A led by DCVC, a $30 million Series B led by Sequoia Capital, and a $70 million Series C led by Tiger Global.
Embark made the decision to go public in 2021. In June 2021, the company declared that it had reached an agreement to list its venture on Nasdaq through a merger with Northern Genesis Acquisition Corp. II for $5.2 billion. The announcement highlighted Embark’s partnerships and fleet operators with major carriers. They paid a per mile subscription for software that would enable self-driving trucks. According to the company, self-driving trucks will be available for carrier operations in the U.S. Sunbelt by 2024. Embark completed the merger in November and traded under the ticker EMBK. The company opened at around $180 per share full of excitation on the road ahead, but share price has been down since.
A January report by short-seller publication The Bear Cave entitled “Problems At Embark Technology” didn’t help matters with the assertion that “current valuation appears to be based on puffery rather than actual substance.” Bear Cave warned that the company “holds no patents, has only a dozen or so test trucks, and may be more bark than bite.”
The Bear Caver report further noted
- More troubling is that Embark appears to lack true economic substance. For example, a July 2021 article titled, “Who’s set to win Big Tech’s ‘insanely hot’ race to self-driving trucks?” by the Commercial Carrier Journal didn’t even mention Embark. One reason may be that the company “holds no patents on its products” and instead “relies heavily on trade secrets [and] proprietary know-how” according to Embark’s SEC filings.
Thus, Embark’s failure to patent has been cited for its lack of technological prowess. Reliance on trade secret is not a way to tell investors you got technology.
Charges that Embark overstated its technological and operational capabilities eventually led to shareholder class-action suits. The company filed its quarterly statement acknowledging its role as defendant in the consolidated securities class action litigation. Should Embark go south, having a solid IP portfolio could have provided investors with IP residual values to recoup some of their investments. Unfortunately, management did not do its job according to analysts such as Bear Cave. Founders be ware!