There’s Real Value in RIM
Colin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many people think Research in Motion (NASDAQ: BBRY) will fall like Palm and become worthless. While a recent drop in profit and declining market share paint a gloomy picture for the company, its competitive advantage, balance sheet and management make it a good investment.
As of the second quarter, RIM had net current assets in excess of $3.4 billion. With a market cap around $4.3 billion, the rest of the company -- including its growing subscriber base of 80 million users, patents and other assets -- is valued at less than a billion dollars. Admittedly, the current balance sheet doesn't matter much if the company burns through cash while subscription rates fall drastically. I will discuss later how new management should steer the company in the right direction and how RIM is certain to retain at least a good chunk of its subscribers.
Research in Motion's security system is unparalleled, giving the Blackberry a significant competitive advantage over other smart-phone makers in the realm of government and business clients. Furthermore, RIM's Playbook and other products they may launch in the future will have the same competitive advantage in these markets. For example, Constable Ken Koke of the Chatham-Kent police force has said: “When I go in the street I have my handcuffs, I have my sidearm, and I have my BlackBerry. It’s part of my gear and not something I would leave the station without. The PlayBook is a natural extension of that.” (Reuters)
While the government and business clients who absolutely need Blackberry's security features reflect under a quarter of RIM’s subscribers, they are a lucrative, stable customer base. Furthermore, RIM's security features are a must for people taking part in illegal activities, such as during the London riots of December 2011. RIM’s Mobile Fusion service allows it to take these strengths and profit as it diversifies across multiple operating platforms, providing a stable income flow in the future.
The London riots also shed light on the fact that Blackberrys are the smartphone of choice for lower-income users becasue of the efficiency of BBM; one rioter who was interviewed said "I pay £5 [monthly] then I get to use it [BlackBerry] for a month. I can go on the internet as well, for a fiver." (Guardian) This is also a reason that Blackberry is the smartphone of choice in emerging markets such as the Philippines.
RIM’s security strength could attract takeover interest. While RIM rejected a take-over offer from Amazon (NASDAQ: AMZN) in late 2011 under the leadership of Balsillie and Lazaridis, new management would be more inclined to accept an offer than the co-founders were. While takeover speculation alone isn’t a good reason to buy shares in the Blackberry maker, it could be a catalyst for a sudden increase in price.
An even likelier possibility is the sale of certain parts of RIM to other technology companies. Recently, there were rumors that IBM (NYSE: IBM) was interested in purchasing RIM’s enterprise division, at a price anywhere between $1.5-2.5 billion (if this sale carried through, it would mean RIM's net current assets would be greater than the company's market capitalization of $4.3 billion). RIM's enterprise division is a key asset for the many technology firms that are interested in capturing the captive customer base that needs deep security for its corporate communications and data.
RIM has hired a new CEO, COO and CMO. The new management has already expressed that they are willing to sell parts or all of the company and license RIM’s security features. In short, they are more willing to create shareholder value than the old management was.
Prem Watsa is skilled at turning around companies and adds value as a board member. Fairfax Financial Holdings’ (NASDAQOTH: FRFHF.PK) 9.9% stake in RIM is testament to Prem’s belief that there is value in RIM and that it can bounce back. The famous value investor, who likes to buy stocks when they are out of favor, recently said “We don’t know if RIM has reached [the point of maximum pessimism], but we figure it’s pretty close.” (The Globe and Mail)
cashcolin owns shares of RIMM. The Motley Fool owns shares of Amazon.com and International Business Machines. Motley Fool newsletter services recommend Amazon.com and Nokia. 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.