The following is my position/opinion on the near term
outlook for Palo Alto Networks (PANW) due to its exposure at their patent trial
based on the facts as I understand them.
None of the following should be construed as investing advice or a recommendation
for any investment:
The Juniper (JNPR) v Palo Alto patent infringement case
should provide ramification for either company.
It is my opinion the risk/reward is skewed negatively towards Palo Alto
heading into the trial scheduled for February 24th, 2014 in
Wilmington, Delaware. The trial should take
about a week or two to complete and a jury verdict should be rendered sometime
in early March.
Markman Advisors
wrote a very good analysis and update of the pre-trial rulings, which can be
found here:
I believe last Thursday's
12% jump was premature and investors evaluated the development incorrectly,
which often happens with patent related developments. Juniper now has 7 patents that they will
argue PANW infringed at trial. PANW will
be unable to argue invalidity at trial, which is a key defense in patent
infringement cases. Juniper only needs
to prove that 1 claim on 1 patent are infringed to prove their case. The above presents a serious risk to PANW in
the short and long term. Besides damages
that could be owed to Juniper, they are also seeking a permanent injunction
that would bar PANW from selling almost all of their product line. Any decision positive or negative from the
court / jury will likely spend a long time in appeals either way.
The case will be a battle of experts from both parties. JNPR needs their expert to prove to the jury
that PANW’s equipment infringes on JNPR’s patents. PANW needs their expert to prove that their
equipment does not use JNPR’s patented method and instead uses a non-infringing
method.
The following is PANW’s risk disclosure from their recent 10Q,
page 27:
Should
Juniper prevail on its claims that one or more of our appliances infringe one
or more of its valid patents, we could be required to pay substantial damages
for past sales of such appliances, enjoined from manufacturing, using, selling,
and importing such appliances if a license or other right to continue selling
our appliances is not made available to us, and required to pay substantial
ongoing royalties and comply with unfavorable terms if such a license is made
available to us. Any of these outcomes could result in a material adverse
effect on our business. Even if we were to prevail, this litigation will be
costly and time-consuming, divert the attention of our management and key
personnel from our business operations, deter distributors from selling our
appliances, and dissuade potential end-customers from purchasing our
appliances, which would also materially harm our business. During the course of
litigation, we anticipate announcements of the results of hearings and motions,
and other interim developments related to the litigation. If securities
analysts or investors regard these announcements as negative, the market price
of our common stock may decline.
We are
vigorously defending the lawsuit. At this stage in the litigation, we are
unable to predict the likelihood of success of Juniper’s infringement claims.
I believe this will add a significant amount of risk to the
investment, which many will fail to understand and add a fear component to the
investment. I expect consistent selling
leading up to the trial as investors remove themselves from the associated
risk. I expect further volatility in PANW
and possibly in JNPR as court developments eventually flow out of court and are
quickly analyzed by the investment community.
I am hopeful that a mainstream news organization will be at the trial
live.
Palo Alto is also scheduled to release earnings before the
market opens on February 24th and will hold a conference call at
8:00am EST.
I have no position in any security discussed and no plans to
execute any trades in any security discussed.
The above reflects my opinion based on the facts as I understand them. I was not compensated for this post or
recommended a position to anyone.
If there are any factual errors, please report them to iphawk@outlook.com , in order for them to
be fixed.
