RIMM stock price continue to collapse as uncertainty about their future weighs in. The Android phones and Apple iOS phones continue to grow their market share at the expense of others. As we have observed, the mobile industry thrives on a rapidly changing landscape, and survivals are those that are able to constantly innovate themselves to stay ahead of competition.
Such industry generally does not make a good case for investing, as business fundamentals can be eroded easily overnight. RIMM makes a perfect example and we would not have considered it as a sound investment to begin with. However, extreme pessimism has been priced into the stock price and the value might be too compelling to ignore at this moment. Though we shall make clear that our investment thesis would be based solely on RIMM ‘s liquidation value instead of their business fundamentals, which we have no interest to analyze or make predictions on.
Graham Net Nets
To provide us with enough safety margin, we thought the best way to calculate liquidation value would be using Graham’s Net Nets Working Capital.
Graham Net Net Working Capital
Short Term Marketable Investments
Other Current Assets + LT Investments
- Total Liabilities
As shown, we have marked down receivables on the balance sheet by 25%, with Inventory and PPE by 50%. Their PPE consists of Blackberry infrastructure and network, which we believe would not be worth as much compared to assets such as lands and, buildings. After taking away total liabilities, we arrive at a per share value of $6.15 which is substantially below the current stock price of $11.
If RIMM ever trades close to this price, we would gladly buy it and we will make sure we buy enough of it. That's the bargain price we hope it will one day trade at. Of course, it is unlikely and the market would have given some value to its patent portfolio and subscriber base of almost 77 mils Blackberry users.
Graham Net Nets + Subscriber Base + Patent Portfolio
So lets just give some credit to these two other assets that they have. If you look up analysts’ reports, articles online, you will end up getting quite a wide range of valuations for these two assets. Anyone’s guess is as good; for us, we shall base our valuations on past market transactions and establish a low to high case scenario.
First, lets look at the subscriber base:
Purchase Price (mils)
% of purchase price
Valuation per subscriber
Microsoft purchased Skype’s 170mils subscribers for almost $8bils back then. This might seem to be a rather lofty price from hindsight, so we have used the Low to Mid to High case, discounted to 20%, 40% and 60% of the Microsoft’s purchase price accordingly. The valuations are shown above, with the lowest at $9 per subscriber to as high as $28 per subscriber.
Patent Portfolio Valuation
Next, for the patent portfolio, we have used the following market transactions to come up with the ballpark for the average purchased price per patent:
Microsoft purchase of Novell patents
Microsoft purchase of AOL patents
Google purchase of Mortorola Mobility
|Price / Patent|
RIMM Valuation of 3936 patents (mils)
It ranged from as high as $1,141k/patent for the AOL patents to 510k/patent for the Novell patents. The average at $784k/patent would seem to be reasonable as RIMM purchased the Nortels patents recently at a transaction value of about $750k/patent.
We did some digging and managed to find about 3,936 patents that are assigned to RIMM from the U.S. Patent and Trademark Office. Using the prior figures, we value RIMM’s patent portfolio to be anywhere from $2bils to $4.5bils. The Wall Street analysts seem to disagree with each other so much over the valuations that they came up with an all too wide range of $2bils to $10bils!
Adding up the Numbers
At the current price of $11, the base scenario is still higher by 3.34%. We believe the calculations made here is rather conservative, as we have marked down all the necessary components as if in a fire-sale scenario.
However, after putting down all the numbers, it seems that the risk-reward scenario is still not sufficient enough for us to make any investment. We would prefer to be buying at a price where we get the entire subscriber base and patent portfolio for free, though we might be a little bit too greedy on that.
RIMM’s 4Q 2012 Business Updates
As we are writing this Post, RIMM’s CEO Thorsten provided some important business updates to the public yesterday.
- Subscriber base increased to 78mils
- BBM user base has grown to 59mils (we have not even factor this in, take it as a free gift!)
- Successful launch of two new BlackBerry 7 phones in India and Latin America
- Progress being made and enthusiasm surrounding their BlackBerry 10
- App growth of 220% y-o-y
- On-going competitive environment, resulting in lower volumes and highly competitive pricing dynamics
- Q1 results anticipated to be at an operating loss
The good news to us is rather that people are selling out on RIMM due to the news of their operating loss. We have expected that to happen given the drastic transformation the CEO is making throughout the organization. Good news to value investors especially as the news send the stock price down almost 7.3% after-market to $10.41. Still not yet low enough for us, so lets hope it drops further (existing shareholders please don't kill us for saying this).
Probably when it reaches close enough to Graham Nets number, we will relook at it again.
Till then, we welcome all to share any views you might have on RIMM.