Rebound or Requiem? Bottom Line, Is Research in Motion a Buy?

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

As the days tick down to Research in Motion’s (NASDAQ: BBRY) Jan. 30 launch date for the BlackBerry 10, the company stock keeps climbing higher.  Are investors setting themselves up for a rude awakening?  After digging deeply into the company through a SWOT analysis, fellow Foolish blogger Robert Zimmerman and I have come to the conclusion that the BB10 is too little, too late to lead to a real rebound in RIM. 

Before you rush to the comments section I’d encourage you to consider just two points that we feel will prevent RIM’s shares from soaring past its former heights.  First, the company needs to return to profitability, in order to do so it must first stop the bleeding.  Both are easier said than done.

Returning to Profitability

While stocks, especially ones like RIM can trade on momentum, over the long term it’s the fundamentals that drive value.  Fundamentally, RIM is still in trouble despite a cash rich balance sheet.  Consensus earnings for this fiscal year call for RIM to lose $1.25 a share.  Further, analysts estimate the company to lose $0.47 a share the following year.  If BB10 is a bust it will kill the momentum the stock has enjoyed over the past three months. 

I don’t think a bust is likely, quite the opposite, I think RIM knows how much is riding on this launch and has pulled out all the stops.  What could damage the company’s earnings potential is the lawsuit with Nokia (NYSE: NOK).  If RIM loses in court it is estimated that it could cost the company between $5 and $10 per unit.  With more than 35 million units forecasted to ship that’s an incremental $175 to $350 million of costs.  While that's a fraction of the company's revenue, for a company that's not producing profits, every penny counts. 

RIM simply does not have the earnings power that a company like Apple (NASDAQ: AAPL) possess.  To be fair, no one in the industry can come close to Apple’s margins and the company’s financial position puts it in much better shape to invest in technology and lockup suppliers.  They’ve simply built a moat too deep for RIM to cross.  Adding to this, Google’s (NASDAQ: GOOG) free Android powered ecosystem has only added insult to RIM’s injury.  The company cannot match its deeper pocked rivals and maintain the margins necessary to rebound.

Stopping the Bleeding

RIM is facing a serious competitive threat in its bread and butter government market.  The proliferation of “Bring Your Own Device” has now hit Uncle Sam.  According to Brook Colangelo, the CIO of the Executive Office of the President, “By exploring options to increase the mobility of government workers, the Administration can save taxpayer dollars and improve its service to the American people.”  The key takeaway is that it might not be the right policy for every agency, in the right environment it is the policy. 

For RIM to ensure that its devices are those that government employees trust, it needs to win on several fronts.  While the company has a long way to go to its spot as a status symbol, what it needs to do is ensure it’s not an also ran.  All indications are that the BB10 is a step in the right direction and as long as the company delivers on a device that its fans can be proud of it’ll still have a chance.   

To do this the company is striking a balance, quite literally actually, with the launch of its BlackBerry Balance.  The technology, "Unifies Work and Personal Use of BlackBerry Smartphones without Compromising Company Security or Personal Privacy."  In addition to this technology the company is coming out with two versions of BB10, one with a touch screen and the other with a keyboard.  It’s important for RIM not to abandon its fan base.  The company is hoping that it can appeal to both markets in an effort to stay relevant while being the device that employees want to use.

Foolish Bottom Line

The launch of BB10 will in all likelihood make RIM relevant again.  The company has around 80 million current users who may upgrade to the new device.  Estimates are as high as 70% but to really move the needle it will need to see that number hit triple digits and then it needs to take market share from rivals.  The company would also need to work out its difference with Nokia in a way that doesn’t crimp profitability. 

RIM very well could do all that and the stock could very well soar.  If you are the type of an investor that likes binary risk and reward situations then RIM could pay off big time.  The thing is, you don’t have to invest in a binary situation to make money in the mobile space.

Share of Apple are currently trading at just 12 times earnings.  The company has more than 20 percent of its market cap in cash and it has growth drivers outside of mobile.   There are just too many potential pitfalls that RIM investors need to maneuver, and over the long term investors would be appear to be better served by investing in Apple instead of banking on a RIM rebound. 

To review the rest of the series to draw your own conclusion you click the links to see the company’s Strengths, Weaknesses, Opportunities and Threats.

latimerburned owns shares of Apple and has the following options: Apple. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend 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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