RIMM – Value Investing Contest Submission Follow Up
is horrible for people who don't do research, yet a wonderful thing for those who do. Value investors should thrive on irrational negativity.
You can read the article I wrote when RIMM was trading at about $7 per share. It can be found here: http://www.gurufocus.com/news/183485/time-to-buy-research-in-motion
Since then, RIMM has rebounded just over $14 per share at close this Friday. More interesting is that the options I recommended in the article are now up 700% since RIMM was at $7 per share.
Since writing the article, I have continued to follow RIMM. I continually get upset with inaccuracies, lack of basic knowledge of the company and outright lies in articles that are published throughout the Internet. It becomes obvious that people are writing articles based on knowledge gained from other articles and no actual research or independent thought.
The crowning jewel in my observations was a statement by an analyst saying that the QWERTY keyboard version (having a physical keyboard) of RIMM's new BB10 phone will not be out until July. This was news to me since RIMM has constantly said that the keyoard will come out shortly after the touch version of their BB10 phone, but more like a month later. Right now it is becoming evident that the new flagship touchscreen smart phone will be coming in February and the QWERTY version in March or early April. Crackberry.com even noticed this comment and spoke with RIMM. While RIMM didn't give an official date in questioning the analyst's statement, it was inferred that the analyst did not have a clue on what he was saying. We'll know release dates at the end of January when RIMM offically launches BB10.
Also, another analyst said that he was expecting BB10 to be dead on arrival. I thought it meant that he didn't see consumer adoption as being a likely outcome. Fair enough. Now it turns out that he thought carriers wouldn't even carry it. Strange, since anyone watching RIMM clearly knew that carriers were on board. So this was another analyst making comments based on no real knowledge or research.
As much as this bothers me, it was a wonderful time to be thinking independently and doing actual research. The lies were amazing. And this made for a potential investment idea as a value investor. Good for us, bad for Lemmings.
However, something strange is happening in the media. For the past year up to maybe a month ago, more than 90 percent of all articles were negative. But now people are changing and realizing that things are not that bad. Today, I'd say that over 50 percent of articles about RIMM are positive.
This is just a follow up article. But I will conclude with an answer to a question. From here ($14 per share), what does RIMM have to do to be a 10 bagger? That means, have its share price go up 10x. I did the math earlier when RIMM was at $13.79. Here is the answer.
How can RIMM take the share price from $13.79 to $137.90? That would mean the market cap has to go from $7.2 billion to $72 Billion.
I'll take the market cap though. Let's make some assumptions. Cash horde stays at $2 billion and share count remains fixed. If RIMM can grow free cash flow from the current level of about $2.5 to $7 billion, it will be worth $137.90 per share. Why?
Here is my back of the napkin fair value math:
fair value = cash + 10 * FCF
plug in my numbers from above $2B + 10 * $7B = $72 billion
There's your answer, RIMM needs to take FCF to $7 billion from $2.5 billion. Funny how math works with undervalued stocks. To get a 10x return, the company needs to grow FCF by just 3x.
A 10x FCF multiple is good for boring good stocks like JNJ that grow about 7% annually. Not hard to imagine for RIMM given the world market. So, let's assume 7% growth and a 10 multiple is good. BB10 needs to bring a big jump in FCF though. The thing is, if BB10 is adopted better than most expect, and FCF actually hits $7 billion in one year's time, growth for a few years will probably be more than 7%. People might be multiplying FCF by 20, not 10. Things can get crazy. Scenarios like this could bring the stock price well over $200.
Even today with FCF at $2.5 billion, RIMM is worth $30 to $40 per share. That just assumes moderate BB10 success.
There is still time to buy RIMM. I highly recommend reading my article and reading about RIMM from a world market perspective. Do your own research. Use articles as a starting point. But verify and invalidate what articles say with your own research.
I own stock and call options in RIMM.
There is some conversation in the comments section. Please be sure to read through that also.