Recent Developments Reveal Serious Underlying Issues For RIM
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The flow of bad news from Research In Motion (NASDAQ: BBRY) continues without respite and the latest was in the form of a press release called a "business update" from the CEO of the company, Thorstein Heins. The Waterloo, Ontario-based smartphone manufacturer announced that it expected to show a loss for the current quarter and attributed the poor results to the increasingly competitive smartphone market.
This is not a one-time result and Heins added that he expected the company to struggle for the next few quarters as it completes the transition to the new BlackBerry 10 operating system. The software is going to be used in a series of new phones to be launched later this year. The company also said that it expected to substantially reduce headcount, and other sources say that the staff of more than 16,000 people could be reduced by 2,000 employees.
The company also announced that it had hired RBC Capital Markets and JP Morgan Securities to help explore its future options. The company did not specifically say so but it appears that the sale of RIM is back on the table. The bleakest assessment of the company's prospects came from National Bank Financial, which compared buying the stock to rolling dice in the casino. To complicate matters further, there appear to be very few potential buyers because of the extremely thin market for buyers of phone manufacturing companies. I personally believe that anybody who could make a success of an acquisition is already out there in the market competing with RIM and profiting from their misfortunes.
It certainly appears that the new line of phones based on the BB 10 operating system represents a do or die effort for the company. The prototypes of the phones have been positively received by developers who believe that it is much easier to make apps for the new line than the older phones. The company has long been criticized for offering far fewer apps, around 15,000, than Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG), which have hundreds of thousands. RIM also suffers from a falty apps review process, as one app recently contained grammar errors along with the unauthorized use of the Twilight book Series. Apple, on the other hand, has been highly critized for its overly tough app review process. Yet, RIM has a lot more to worry about as Apple carefully plans the release of the iPhone 5, likely in the Fall of 2012. The release could be a knockout blow for RIM, while making Apple the most profitable company in history. RIM has also been left in the dust by Google, especially after the Motorola merger. Specifically, Google became a direct threat to RIM's corporate business. This move put RIM in tough position as it needed to either join forces with another company, or sell itself. RIM will definitely need to get its marketing act together to make a success of the new phones.
The company that pioneered instant e-mail on smartphones is now neck deep in trouble and its devices, whether tablet or smartphone, are taking a fearful beating, not only from the likes of Apple, but also from companies like Samsung. However, if you look at the financials dispassionately, they are not so bad and it is the pessimism about the future that is actually weighing down the stock. The company has been consistently profitable and for the last fiscal ended March 3, it shows an EPS of $2.22 per share. Though this is a major slide from the $6.34 per share in the fiscal ending 2011, it is nevertheless a solid operating profit. RIM has over $2 billion in cash & investments on the balance sheet and was even the first quarter of fiscal 2013 where a loss is expected is expected to generate positive operating cash flows.
The company is currently trading at a substantial discount to book value, but this does not mean that it is a good buy at this time. It is unlikely that anybody is going to acquire the company as a whole but there are bits and pieces that can be sold off piecemeal. If you look at the balance sheet purely in terms of liquidation value, there are some assets that could be quite valuable. For instance, PP&E, which is RIM's server network, is worth billions, according to many analysts. If you include the messaging business, the two could be worth up to $3 billion. The company also has patents that could be valuable in the patent battles currently characterizing the industry. Excluding the patents bought from Nortel as part of a consortium, the other patents could be worth up to $1.5 billion.
The stock could have value as a liquidation play but there are a number of factors that are going to influence this value. It is not yet absolutely clear whether the company is actively seeking a sale of itself and a quick sale would help only if it can be accomplished while the company is still a going concern. Moreover, as with any liquidation play, the risk lies in the actual value that the intangible assets would raise when they are sold. The prospects for BB 10 need to be considered in the light of the cutthroat competition in the smartphone market. I would strongly recommend that you sell your existing holding in RIM while there are still takers for the stock. If you like the company, you can always buy when there is more clarity about the future.
BobbyFisher has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. If you have questions about this post or the Fool’s blog network, click here for information.