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Research in Motion: A Good Buy at Its Current Price?

June 21, 2011 | About:
The Blackberry makers have faced quite a few challenges to their handheld devices with the strong headwinds of new touch-screen mobile technology coming into the market, such as the iPhone of Apple (AAPL) and Android of Google (GOOG).

RIM (RIMM) was once an $80 billion enterprise; now it is worth $14.5 billion, only around 18% of its high within five years. Its price plunged further right after it released second-quarter sales and profit forecasts below analysts’ estimates. The second quarter of 2012 is expected to have revenue around $4.2-$4.8 billion and (EPS) of $0.75-$1.05 diluted. For fiscal 2012, the EPS is expected to be around $5.25-$6.00 diluted, excluding any one-time charges or share repurchases.

So is the stock really cheap? Or is it still overvalued?

RIM offers greater security with its own e-mail servers whereas Apple and Android are famous for so-called entertainment and information. So the business has been targeting the niche market and still got the dominant position among corporate clients. However, new products coming out from competitors have affected the company in big way. According to an analyst of Sanford C. Bernstein & Co. in London, the market share in North America has reduced from 54% to only 13%. Apart from that, the analyst also commented that the customer base would expect to increase to 77 million by the end of next fiscal year, from 42 million last year, and around one fourth of those customers would be corporate users.

Some key executives have just left the company. Brian Wallace, RIM's vice president of digital marketing and media, left the BlackBerry maker for Samsung Telecommunications America. Four months ago, Keith Pardy, chief marketing officer for two years, has left and Paul Kalbflesich, who has been with the company as vice president of brand creativity for 11 years, left early this year.

It currently has $2.1 billion in cash on its balance sheet — no short- or long-term debt. The main liability is the accrued marketing costs, warranties, salaries, etc. With the book value of $8.9 billion, the level of total financial leverage of 1.4 (Asset/Equity), and the free cash flow standing at $2.8 billion, RIM financial health is currently in very good shape.

With the current price, RIM seems to be the cheapest of its competitors if we look at the P/E trailing twelve months.

RIMM AAPL MSFT NOK
P/E TTM 4.39 15.44 9.82 8.48


Even with the adjusted estimation, if the earning is from $5.25-$6, the leading P/E is still around 4.5–5 only.

RIM is now widely thought of as the target for acquisition by either Microsoft (MSFT) or Dell (DELL). For Microsoft, it builds its share in smart phones and gains a device to complement its Windows 7 platform. And as Dell has tried to get into the hand set business with Venue Pro products but seemed to face difficulty, the acquisition of Rim could help Dell penetrate into the smartphone market very rapidly. Even at $40 a share, RIM would be valued at around 7.5 times next year's earnings. That’s still less than the average communications equipment provider, which trades at about 15.4 times

As the technology industry changes extremely fast, the big winner today can be a loser tomorrow if it cannot adapt the new trends flexibly and fast enough. The investor should think and do his/her own research very carefully before initiating the position in RIM, even though it might be seen as somehow undervalued.

Disclosure: The author owns no shares in RIM at the time of writing this article.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.1/5 (34 votes)

Comments

mikewen
Mikewen - 3 years ago
It will take another year for RIMM to reach bottom, if ever.

RIMM does not have much assets.

Nokia got very important GSM/3G/4G patents, Maps, great hardware, distribution network, great

supply chain, etc. And now they have Microsoft support.

What RIMM has ?

Only assets: BBM, BlackBerry server.

BBM will because less valuable everyday, Skype and other IM apps are eating their lunch.

lynchfan
Lynchfan - 3 years ago


I don't believe RIMM will ever earn 14.5 billion in earnings over its life because I think its phone business will die within 3 years -- they had a phone that was good for calls + email. They're phones aren't good general purpose smartphones (calls, email, music, games, social networking, web search, etc). And I don't see how they can compete with the 3 biggest tech companies spending tons of money improving their products.

Are its assets worth anything? Cash / Patents / IP / branding, etc? I dont know as I havent looked, but based simply on current P/E, I'm not buying.
ken_hoang
Ken_hoang - 3 years ago
Thanks for your ideas Mikewen and Lynchfan

As mentioned above, RIM is well known for its security. That is why the majority of its clients are corporate ones.

Investment is about benefits/costs and its probability of the downsize as well as the upside. Just think about when the business was valued more than $80billion in the market, and it was very strong player and was predicted the huge growth. Truly that the technology industry are subjected to very rapid change and the winner today can be the loser tomorrow.. or.. vice versa.
forexnutca
Forexnutca - 3 years ago
Please do your research on QNX. The world needs RIM for security. The fact that QNX will support OS7 and "other" emulators, is very compelling.
tonyg34
Tonyg34 - 3 years ago
handsets (smartphones) are a commoditized product with only moderate barriers to entry. Competitive advantages are short lived as what one tech company can make any other can readily recreate or reinvent, reverses engineer, or improve upon. Thus, it is reasonable to assume that margins will continue to contract over time. Yes, even for a prestigious branded product like the iPhone, any commoditized product's cache has an expiry date. Those fun apps work on multiple OS platforms and do not constitute a sustainable competitive advantage.
energywonk
Energywonk - 3 years ago
ken hoang/others. i work for the of the largest energy companies in australia (enterprise) we are abandoning RIM for exactly the reason you claim is the companys moat-security. more specifically it is costly to run the separate servers required for RIM services. the organisation has adopted the iphone. i myself use android and believe this platform will prevail globally in time. this discussion is like dejavu on microsoft. tech is a poor investment unless you can pick the trends. please see the plethora of comments by buffett on this matter. short RIM. it like MSFT is dead already.
mikewen
Mikewen - 3 years ago
If you think the most valuable assets of RIMM is mobile security, you can value this asset by similar transactions in the market.

Just like when I try to estimate the value of Nokia's patents, I use Nortel's patents bid as a reference.

Of course Nokia's patents much more valuable than Nortel's, Nokia won legal fight over Apple proved that.

Now it's easier, you can just calculate how much license fees Nokia can get from Apple and other headset makers for a few years, and estimate the value just like value a business.

Nokia will put their map on all smartphone AND S40 low end phones, you can estimate how much add-value for every headset, and you got the value of their map asset.

I did not do my home work on RIMM so I do not know exactly their assets worth,

but I only see their assets value at just a few billions.

That's how much RIMM worth once their earnings gone.

ken_hoang
Ken_hoang - 3 years ago
@ Forexnutca: QNX has sold to RIM in 2010 right? Could you describe more in details of RIM's security if you have any idea. Thanks

@Tonyg34: That's true, tech industry is subject to very rapid change. If any tech company doesn't get updated itself to the trends, it definitely fails.

@ Energywork: Thanks for the info, appreciate it a lot. If RIM's security moat is narrow, then the company would be in very dangerous position. However, as any tech company, if it brings to the market another booming product, it will be another story. But who knows?

When you talk about MSFT, the business has been doing nothing on average in terms of stock market price performance, consistent dividends. During 2008, the price hit $15, and now's back to $25.

@Mikewen: Thanks for that. Relative comparison should be done if we compare the value of its patents as well as businesses. Let see how the next quarter earning comes out.

@ ALL: how bout if Dell of MSFT purchase RIMM? That is the possibility which gets a lot of talk in the Street.

noblepaladin
Noblepaladin - 3 years ago
RIMM looks cheap on valuation basis, assuming they don't completely die out in the next few years (and this is a very risky assumption). However, I can buy something like a Microsoft or an Intel, who are pseudo-monopolies trading at single digit P/Es ex-cash, and they still have a very strong moat and some growth. I can buy Apple at an ex-cash P/E of about 13 if I want growth. I just can't justify going into RIMM when the safer plays are ridiculously cheap too. Given the risks to RIMM's business model, I can't see it trading above a P/E of 5 when you can get Microsoft at an ex-cash P/E of 7.
JeanPierreSarti
JeanPierreSarti - 3 years ago
I too work in IT in a Medical environment (Hospital and School) and as an IT person from this environment I will opine that Blackberry is DEAD MAN WALKING. Before Iphone, of course, Blackberry was the communications device for Doctors, most students, office staff and Hospital staff etc etc.

Now if you show up with a Blackberry you get laughed at! Sadly, I am not even joking. It's the APPS that Blackberry did not push enough. They neither have the cache of Apple or the openness of Android. From what i have seen and been told these apps are now as important and fundamental as a stethoscope.

Anyway just my view. Good Luck.

c12mintz
C12mintz - 3 years ago
I think it's erroneous to compare MSFT stock to RIMM stock. People like to bash Ballmer and MSFT for the last decade of stock performance, but let's be honest here.. MSFT was extremely overvalued in 2000, we're talking P/E of 40+. Now the market has simply caught up to MSFT, and as a company they have done GREAT. As @Noblepaladin says, INTC and MSFT are both safe slow-growth companies- ideal blue chips for today's markets. The only reasonable comparison with MSFT and RIMM is MSFT in 2000 == RIMM in 2008.

RIMM today is a completely different story- I believe the best parallel can be made to Palm and the iOS. However RIMM is debt free and has a decent amount of cash. Palm was loaded with debt to the eyeballs... Even as Palm sunk to a low enough price, HP swept in and bought them out under the penny pinching auspices of Hurd. I think RIMM is a very attractive takeover target, especially considering MSFT paid $8B+ just for Skype (awful budgeting IMO). Even if RIMM is not bought out, I believe they can re-innovate and at least sustain their current level of sales. In the tech world, changes occur quickly. Android went from teaser commercials in '08 to smartphone leader in '11. Apple went from has-been clunker in 2001 to tech superstar in '05-'08 to tech market leader in '09-'11.

I think it's too easy for people to bandwagon either positively or negatively on a stock without watching the bigger historical picture and examining financial metrics. All of you that are cursing RIMM, where were you in 2008? I bet a majority of yall were initiating long positions in RIMM and commenting positively on the stock in online message boards... Same for MSFT in 2000...

Disclosure: Long HPQ ($35) and RIMM ($26)
forexnutca
Forexnutca - 3 years ago
http://www.qnx.com/products/reference-design/fastboot-building-automation-kontron-video.html

QNX is not only used in their upcoming handsets. A lot of people believe that the new playbook runs with the QNX OS, but really it is a platform for OS and other "players". RIMMS OS7 and other "players" will run on top of QNX. This goes against the programmers arguement that QNX is to hard to program. If anything, this opens the world to Research in Motion.

QNX also works much like a submarines individual compartments as it has CPU utilization through adaptive time partitioning. This allows the platform to contain threats to the system (think malware). This is why QNX has been a dependable on helping government defense departments, security agencies, and their contractors develop advanced, secure, mission-critical, realtime systems.
ken_hoang
Ken_hoang - 3 years ago
Agree with C12mintz comments. Nobody knows what the next renovation comes through. Look at RIMM in 2007,2008 as the huge potential for growth, and now it's sinking.. But for the huge amount of cash with little debt, it can spend to renovate and develop the new product following the trends if it want to.

Besides, the core business is for security, and thanks Forexnutca for the comment, if it is true, then RIMM currently owns the tremendous asset value that nothing can't be substitute.
superguru
Superguru - 3 years ago
Value Trap?
valueradar
Valueradar - 3 years ago
RIMM's profit margin has been in decline for the last 5 years. This is something investors should aware if you decide to buy into the company:

ken_hoang
Ken_hoang - 3 years ago
Thanks Superguru and Valueradar

Not sure whether it is the trap or not, RIM margin has been fluctuating up first and then down.. But the down over several years is not very significant comparing to the rist from 03-05.

Anything can happen in tech field, and it happens fast. The only thing I count on the business is its security. It can be a good stock in the well diversified portfolio and bad stock for the concentration portfolio.

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