Why You Shouldn't Stick a Fork in RIM
Alvin 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), the maker of the iconic BlackBerry, looks like just another big name company that is about to kick the bucket. Executives are leaving the company in droves, their market share is shrinking, and their stock price has dropped from a high of almost $150 per share in 2008 to a measly $12.67 per share as of this writing. RIM ignored the emergence of strong competition, specifically the iPhone and Android phones, and is now paying dearly for it. RIM's smartphone market share in the USA in February 2012 fell to 13%. This is a huge decline from RIM's February 2010 smartphone market share of 42%. At the same time, Apple (NASDAQ: AAPL) rose from 25% to 30% and Google (NASDAQ: GOOG) rose from 9% to take the lead at 50% (comscore). In addition, RIM only recently reached 70k apps, while Google and Apple are racing for one million with Google at over 400k and Apple at over 600k (mobilesyrup).
In its most recent quarter, Q4, RIM posted a GAAP loss of $0.24 per share, a decline of 21% in BlackBerry smartphones shipments from the previous quarter, and a decline of 25% in revenue from the previous year. When you look at the generalities, RIM definitely appears to be just another pending Apple road kill. However, if you look deeper into the numbers and some recent developments, a fairly solid investment opportunity emerges.
RIM's Current State (Positives)
Shrouded by the negativity surrounding RIM, there's actually some positive news. RIM recently released the full BlackBerry Mobile Fusion, which extends BlackBerry support in enterprises to devices that use Google's Android and Apple's iOS operating systems. By extending its state of the art security to other platforms, RIM gains access to customers who are willing to pay for BlackBerry security, but not necessarily their handsets. This should help sustain RIM's current service revenue, which in Q4 was $1.1 billion. RIM does not provide margin numbers for its service revenue, but it is higher than hardware margins. Assuming a conservative 6% net profit margin (RIM's net margin for fiscal year 2012), RIM should theoretically get about $260 million in profits per year, or $0.50 per share, from services.
Digging deeper into RIM's Q4 numbers, one of the biggest positives of Q4 was RIM's subscriber base. Although RIM shipped a relatively low number of handsets, it grew to 77 million subscribers in Q4 up from 75 million subscribers in Q3. Although the growth in RIM's subscriber base slowed down, the 77 million subscribers show that BlackBerry still has many fans. In addition, the GAAP loss from Q4, while not good, is not as bad as it seems. The loss includes one-time charges of $346 million for impairment of goodwill and $197 million for inventory write down. Excluding the one-time charges, net income was $418 million or $0.80 per share. This is still a huge drop from the $1.78 per share from the same quarter last year, but it also shows that RIM can still be profitable. In Q4, RIM had a positive cash flow from operations of $1.1 billion and increased its cash to $2.1 billion from $1.5 billion in Q3.
Most importantly, RIM finally understands it needs to change. CEO Thorsten Heins announced in the Q4 conference call, "it is now very clear to me that substantial change is what RIM needs." Heins also cleaned house, announcing the departure of CTO David Yach and COO Jim Rowan. Former co-CEO Jim Balsillie is also gone from the Board of Directors. A very interesting and positive management change made by Heins is promoting Dan Dodge, the co-creator and former CEO of QNX, as the new chief software architect. Promoting Dodge makes perfect sense and should help ensure the timely launch of BB10.
Predicting the future is hard, especially if the company has been losing market share. However, RIM has a solid plan. BB10 is on schedule to be released later this year. In addition, Heins is now looking into partnerships and licensing agreements. Specifically, Heins is looking for a partnership that will deliver "media consumption applications." One of the consistent knock on BlackBerry has been the lack of apps. It appears that Heins will try to address that problem through partnerships, where RIM will provide the core platform and other companies will provide the entertainment. In addition, RIM plans to release BB10 prototypes to developers in May. This should give RIM a good chance to get feedback before finalizing the OS. In the meantime, RIM will release new entry-level BB7 phones to try to sustain its subscriber base until BB10.
Rim is a Bargain
When investing in stocks, one should always remember that there is a difference between value and price. You can find a good business, but if you overpay for it, then you're really just throwing your money away. Keeping this in mind, let's take a look at RIM's balance sheet. It is pristine. Currently, RIM has zero debt and a tangible book value (basically the liquidation price of a company) of about $12.42 per share. Therefore, at RIM's current price of $12.67 per share, investors are only paying $0.25 per share for RIM's earnings power. As was previously estimated, RIM's services income alone should net about $0.50 per share per year. Throw in the revenue from the other business segments, zero debt, and the potential of QNX and it becomes clear that RIM is undervalued.
In conclusion, investors shouldn't ignore companies that are out of favor with Wall Street. Doing so could prevent investors from making a solid investment. Am I saying everything is rosy for RIM? No, every investment has risks and for RIM the next few quarters before BB10 will be rough. As I previously stated, RIM's market share has been steadily declining. In addition, the competition is fierce with the likes of Apple, Google, Microsoft, Nokia, Samsung, Amazon, etc. Furthermore, RIM has about $1 billion worth of inventory that could be written down again next quarter. That said, RIM is priced at just $0.25 above tangible book value. The potential of BB10 to bring back market share alone is worth that small risk (QNX has a lot of potential). RIM has $2.1 billion in cash, a tangible book value of $12.42 per share, zero debt, QNX, BlackBerry Mobile Fusion, a profitable business, 77 million subscribers, and is priced at just $12.67 per share. RIM is a bargain.
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