The Bullish Case for This Fallen Angel
Fani is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've never owned an iPhone in my life. Most of my friends do, and I think I can see why. Apple's iPhone is above all trendy. Sometimes, selling people what they think they want instead of what they actually need can be mysteriously successful. It is called “marketing” and Apple is really good at it.
I have been using for the past five years a BlackBerry device. It has done its job perfectly and never needed to be fixed. However, is this enough to underline my bullish feelings about this stock? No, it is not. Overall, I believe that 2013 is going to be a “break it or make it” year for Research in Motion (NASDAQ: BBRY). Even though, the continuous slide in earnings has disappointed longtime investors, I think that it is worth keeping an eye on this Waterloo-based tech giant.
Kin Hubbard once said: “The safest way to double your money is to fold it over once and put it in your pocket.” Investors that were not too scared to start a position in Research in Motion in October 2012 have every reason to brag now that the stock has more than doubled. Over the past three months, RIM has performed impressively by returning about 130%. Consequently, investors sentiment has been significantly improving.
While three months ago, out of 42 analysts tracked by Wall Street Journal only one indicated a “buy” rating, currently, another four seem to agree. Recently, Jefferies & Co analyst Peter Misek raised his rating from “hold” to “buy” and lifted his target price by $6.50 to $19.50. Also, Scotia Capital has revised its rating to sector outperform ahead of the launch of the BlackBerry 10.
Again, these recent upgrades, might not be enough to convince a cautious investor that the company is really returning back from the dead. It is too soon to confirm that the once-pioneer of the smartphone industry achieved the unexpected by gaining some of its old fortunes. Nevertheless, there are several reasons to believe that this could be actually possible:
The firm's last two earnings releases show a modest rebound. I do not suggest that Research in Motion managed to become profitable overnight. However, both fiscal Q2 2013 and fiscal Q3 2013 financial results beat analysts' grim expectations. For the latest quarter, GAAP net income, including loss from discontinued operations, was $9 million signaling a positive quarterly change. The company ended the quarter with a solid cash position of $2.9 billion and negligible debt. For the first nine months of 2012, net cash provided by operating activities marked a small boost compared to the same period in 2011. Having adequate cash reserves and being free of debt is certainly a comparative advantage, especially for a company that is at the beginning of a turnaround process. Nokia Corporation (NYSE: NOK) is also making transformation efforts which are directly associated with restructuring related cash outflows. Nokia has been substantially improving its non-IFRS results, which exclude special items such as one-time restructuring charges. However, for the fourth quarter of 2012, Nokia reported a 22% year-over-year decline in net cash and liquid assets even after excluding cash outflows related to restructuring activities of approximately €1.5 billion. Consequently, the firm is thinking of scrapping its dividend for the first time in two decades.
At the moment, Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL) are the protagonists in the tough U.S. smartphone market. Throughout 2012, both companies continued to take share from the old guard. As of November 2012, Google's Android operating system dominated the market and claimed the lion's share once again. The firm's market share stood at over 50%, up my almost 7% from the prior year. Apple came second with its market penetration reaching approximately 35% signaling an improvement of 6.3% on a year-over-year basis. On the other hand, Research in Motion, appeared to be losing the game. It remained at the third position, but its market share marked a significant deterioration of more than 9%. However, it did not have a new product to present to the market. RIM's market share followed a downtrend primary due to anticipation of the upcoming devices. So, even though some might think that beating players like Apple is wishful thinking, still, it was an uneven fight.
Just days ahead of the BlackBerry 10 release date, all eyes are focused on the parent firm. Against the backdrop of a dubious demand for the recently launched iPhone 5, the new handsets running OS 10 are expected to be the scene-stealer by impressing mobile operators and targeting increased customer acceptance. Leading U.S. mobile carriers such as Verizon Communications, AT&T Inc, T-Mobile USA, and Sprint, as well as, European network providers have confirmed their support for the new BlackBerry products. Strong business response to the BB10 Ready Program, which offers online training, could be an early indicator of increased sales in the U.S. market. Moreover, Research in Motion is well-positioned to benefit from overseas exposure. Aircel and Vodafone are preparing to market the new devices in India, where smartphone penetration has, yet, a lot of room for growth. Even in the worst-case scenario that the BB10 fails to fulfill market expectations, it seems like the parent company has a back-up plan. Chief executive officer, Thorsten Heins, has left open the possibility of licensing BlackBerry software or even selling the firm's hardware division.
To sum up, Research in Motion has what it takes to achieve a dynamic comeback in the ultra-competitive smartphone industry: cash on hand to survive this transitional period, a strong and competitive product, and the willingness to regain some of its old glory. Certainly, betting on just the performance of BB10 is risky and stressful. If the soon to be released handsets fail to attract the desired level of customer interest, then things are going to get really ugly. Research in Motion has a long way to go before claiming a safe place in the industry and improving its margins needs to be a top priority. However, I choose to be on the bullish side and expect 2013 to be a year of meaningful returns for the firm's shareholders.
FaniKel 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!