Why This Company Offers an Excellent Investment Opportunity

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Research In Motion (NASDAQ: BBRY) has recently launched its new operating system BlackBerry 10 and unveiled two smartphones, Z10 and Q10. The new platform provides several ways to browse, download, purchase and manage content that can be accessed via BlackBerry smartphones, BlackBerry PlayBook tablets or computers. In preparation for the launch of BlackBerry 10, RIM has announced a name change for its app store from App World to BlackBerry World.

After some hard deliberation, RIM CEO Thorsten Heins explained that they made “the tough call to do it alone,” meaning RIM had made the decision to build a new and secure operating platform from scratch. Even more, Heins proudly revealed that RIM is becoming BlackBerry. Yes, one brand and one promise under one new, unified name. The company also said its new stock ticker will change from RIMM to BBRY to fit with the new BlackBerry name.

Apple’s (NASDAQ: AAPL) iPhone and Google’s (NASDAQ: GOOG) Android have really taken out a significant chunk of RIM’s market share. According to a report by research firm Strategy Analytics, Samsung, the leader in Google’s Android, sold nearly 63 million smartphones in the fourth quarter of 2012, giving it 29% market share, compared to the 22% share Apple captured in Q4 with sales of 47.8 million iPhones, as Apple reported. Nokia (NYSE: NOK) sold 6.6 million smartphones in Q4, Nokia confirmed, including its Lumia smartphone running Microsoft‘s Windows Phone 8 operating system, for a 3% share of total Q4 sales. Nokia actually trailed several other manufacturers in Q4, including Sony in third place, China’s Huawei and ZTE in fourth and fifth place, and RIM in sixth place.

The new mobile OS could help RIM close the gap between BlackBerry and others. RIM shares surged significantly in the last few weeks and then corrected, leaving a lot of people clueless in buying the stock. Would it be prudent to get into the counter right now?

RIM betting big on BlackBerry 10

<img src="/media/images/user_14403/bb10_large.png" />

Image: BlackBerry's New Z10 Smartphone

RIM is betting big on BlackBerry 10, which will be a one stop shop for entertainment. Of course, the chances of BlackBerry 10 propelling RIM into the first or second place in terms of market share seem pretty slim, but RIM will certainly stage a comeback with its new OS. The recent surge in RIM’s stock not only signals that Wall Street believes in RIM’s comeback efforts, this is also encouraging for the company.

BlackBerry 10: what’s unique?

People were skeptical about BlackBerry 10, and whether it’ll be able to compete against the likes of Android and the iPhone. After countless delays and a large executive shakeup, RIM had a huge task ahead of itself as other companies continued to move forward. But people who have seen it have been impressed. "BlackBerry 10 gets mostly high marks in early reviews," Los Angeles Times reports

BlackBerry 10 will appeal to both home users and corporate users, as the two worlds can easily be separated on one device, RIM CEO Heins said in an interview. The new operating system can be divided into two parts and will be encrypted differently. “Our aim is not only to smartphones, but also to the use, for example, in cars that will be in the future increasingly networked,” Heins added.

Along with the Bring Your Own Device (BYOD) trend incorporated into the BlackBerry, RIM is focusing on integrating its new smartphones into different platforms. There are an endless amount of apps available for Android, iPhone and old Blackberry world, yet a large portion of them prove to be low quality and inefficient. For the new BlackBerry World, Heins says that it will aim for quality apps, not quantity, with about 70,000 applications available in the new BlackBerry World.

With the new operating system people will be able to share content though BBM, FaceBook and Twitter. Users will also be able to tap their smartphones together to invite others to download their favorite apps.

RIM could sell-off hardware division

The Canadian smartphone maker is considering selling off its smartphone hardware division after the launch of BlackBerry 10, CEO Heins said in an interview with the German newspaper Die Welt. “Our strategic review is still running” Heins added, “We do not want to limit our options.” Also on the table is the possibility of licensing BlackBerry 10 to rivals, something Heins has been open to since taking on the role of CEO, though he warns that the new platform would need to prove itself before that was viable.

Why you should own the stock

RIM has a free cash flow yield of more than 30% with a rising FCF (free cash flow) curve. Free cash flow yield standardizes the free cash flow per share a company is expected to earn against its market price per share. The ratio is calculated by taking the free cash flow per share divided by the share price. This is usually meant to measure GAAP earnings per share divided by share price. Generally, the lower the ratio, the less attractive the investment is and vice versa. The logic behind this is that investors would like to pay as little price as possible for as much earnings as possible. 

<img src="http://media.ycharts.com/charts/7fa090761cf71a6e65c174242cc20098.png" />

RIMM data by YCharts

With an FCF yield of more than 30% RIM's stock price can certainly rise way higher from current levels. With zero debt on the books and $2.9 billion in cash reserves, if the company sells off the hardware division going forward, it could focus on expanding its software business. Goldman Sachs reiterates a "Buy" rating on RIM shares, and a $19 price target, urging investors to “use the recent ‘sell the news’ pullback to add to positions.”

We continue to see significant upside to estimates over the next three quarters, as BB10 devices drive upside to the Street’s ASP and margin forecasts. With 110 carriers completing lab testing by February, 50 carriers offering integrated billing, and Verizon getting an exclusive for the white Z10, we continue to see strong carrier support for BB10. Consumer adoption will decide the ultimate outcome, but estimate revisions should be a positive catalyst in the meantime.

Although RIM is undoubtedly playing catch-up with iOS, Android, and Windows Phone, the company made the best decisions for its future with developing a platform that is future-proof for the next ten years.

Anindya7 has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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