Buy RIM at Scrap Value and Get BB10 Plus Service Business for Free

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

As a follow up to my previous post, I decided to conduct a liquidation valuation of beleaguered tech giant Research in Motion (NASDAQ: BBRY).

Overview

RIM represents a spectacularly attractive investment opportunity. Investors have abandoned the handset device maker as the company struggles to fend off new competitors in the smart-phone space, including Google’s (NASDAQ: GOOG) Android operating system and Apple’s (NASDAQ: AAPL) iPhone handset. At the stock’s current price, investors are valuing RIM at rock-bottom prices and almost completely discounting any possible success with the company’s new BB10 operating system. 

Let’s walk through the valuation.  

Here is the breakdown of the above chart:

Cash and Cash Equivalents (100% of Book Value):  Nothing easier to value than cash on the balance sheet. Cash represents 35% of RIM's market capitalization. However, we can expect RIM to burn through some of its dough in 2013 as the company launches its new BB10 operating system. 

Accounts Receivables and Other Current Assets (90% of Book Value): I applied a small mark-down to current assets to account for the risk of defaults and collections costs.

Inventory (0% of Book Value): RIM’s inventory consists primarily of handsets and other devices which would be almost worthless in liquidation (as seen in the past). So to stay as conservative as possible, I decided to completely write off inventories.

Long Term Assets (50% of Book Value): RIM’s long term assets consist mostly of property, plants and equipment.  Land and buildings can be easily sold to other businesses so these assets can be valued close to book.

RIM also boasts a highly lucrative enterprise service business that has attracted the interest of IBM (NYSE: IBM). Analysts have estimated the value of this unit between $1 billion-$2 billion. For laughs and giggles, I'll value the unit at zero and throw it in for free. 

Patent Portfolio and Subscriber Base: In the liquidation of a technology company, the business’ intellectual property is often the most valuable asset. RIM's intellectual assets would be worth billions to competitors such as Nokia (NYSE: NOK), Microsoft, or Google. Analysts have valued RIM’s subscriber base and intellectual property between $2.5 billion and $10 billion. I used the low end of this range to be extra conservative.

After subtracting liabilities, we arrive at a liquidation value of $11.67 per share.

Spectacular Risk/Reward Ratio
At RIM’s current price, investors are valuing the company at scrap levels and assigning almost no value to the operating business.

If the BB10 launch is successful, RIM would once again be valued as a going concern.  Analysts have pegged upside targets between $16 - $43 per share.

If the BB10 launch flops (which other bloggers here at the Fool have noted is quite a likely outcome here, here, and here), RIM could be liquidated and return most of investors’ capital to shareholders. 

In the event of a failed OS campaign investors can be confident shareholder interests will be protected due to a consortium of activists, including Prem Watsa and Jaguar Financial Corporation. These activists have been successful at influencing the company in the past, most notably with the termination of previous chief executives James Balsillie and Mike Lazaridis, and would ensure the liquidation of the business.

Foolish Bottom Line

Research In Motion is a textbook deep value trade. With the stock valued at close to nothing, investors can purchase RIM at net asset value, with its BB10 operating system and enterprise service business thrown in for free.

If the business continues to deteriorate, investors can liquidate the company, returning most of their capital. However, the stock has massive upside potential if there's any improvement in the underlying fundamentals. A very attractive risk/reward scenario.


RobertBaillieul has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and International Business Machines. Motley Fool newsletter services recommend Apple, Google, and International Business Machines. 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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