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Charles Sizemore
Charles Sizemore
Articles (507)  | Author's Website |

BlackBerry 10 Will Not Save RIMM

January 22, 2013 | About:

With a little more than a week to go before BB10 hits the stores, Research in Motion (RIMM) has become a hot stock again. The company that invented the smartphone may be reestablishing itself as a major player in mobile. Or, we could be watching the biggest dead-cat bounce in history.


As recently as this past September, RIMM was left for dead, trading for barely $6 per share. As this article is going to press, it has nearly tripled from those levels. A rally that large and over that long a stretch cannot be dismissed as short covering. Clearly, a lot of investors believe that the BlackBerry is making a comeback.

We’ll see about that.

If you’re a nimble trader with a short time horizon, RIMM might be worth a gamble. Given the current level of speculation in the stock, there should be some great trading opportunities over the next few weeks, long and short.

But if you’re an investor with a longer time horizon, you should view the rally in RIMM’s shares with a healthy dose of skepticism. RIMM is not Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) or Microsoft (NASDAQ:MSFT). Any of these tech giants can afford to make a colossal mistake or two or to have a new product bomb. Microsoft and Google have both proven this; with the exception of the Android operating system, neither company has come out with a hit product in years, yet both continue to generate gobs of cash. Even the infallible Apple had its Maps public relations disaster last year, yet it hardly slowed the company down (stock price crater aside).

But RIMM? For the erstwhile mobile leader, BB10 is do or die. If the operating system fails to inspire consumers, then the company is finished. This is a binary set of outcomes. Either BB10 is a hit, and RIMM matters again, or it is a bomb and it is time to sell off the company’s assets and close up shop. Given the competitiveness of the smartphone race, no prudent investor would make that bet.

Let’s pick apart some of the bullish arguments.

RIMM’s messaging and secure email system is a competitive advantage that keeps customers—and particularly enterprises—loyal. Wrong. I used to think I would miss my BlackBerry messenger and inbox…right up until I bought an Android.[/b]

But beyond this, one anecdotal bit of news late last year made me realize that BlackBerry was finished. Fannie Mae—the quintessential enterprise customer with overzealous security requirements—was allowing their portfolio managers to turn in their company-issued BlackBerries and instead access their company email via their own iPhones and Androids using a custom app.

I had been skeptical that the “bring your own device” trend would ever expand beyond small businesses. Big business and government would never tolerate the loss of control or security risks. Well, never say never. When government-sponsored entities allow it, it’s hard to imagine who won’t.


[b]BB10’s new features are a “game changer.”
Really? Because everything I see looks a lot like something I’ve seen somewhere else. The new BlackBerry Messenger (BBM) has voice calling, so you can call friends internationally from wifi or your data plan and not use mobile minute.

It seems like I’ve seen this before. Oh yeah, it’s called Skype, and it’s already available on every other mobile platform except the BlackBerry.

Rumor has it that BB10 has the fastest browser. Ok. For lack of better information at the moment, I’ll concede that point. But given that mobile devices tend to be app-driven and not browser-driven, that’s a small victory at best.

Rumor also has it that BB10 will have the best auto-correct and word prediction, which are valid selling points for a touchscreen phone. But will that compel a customer to choose a BlackBerry over the newest, snazziest Samsung Galaxy? I’m thinking no.

There is huge pent-up demand for the BB10 after months of delays. This is laughable. Yes, plenty of current BlackBerry users will upgrade. But given the poor experience with the brand in recent years, I don’t see too many former users who defected to the iPhone or Android going back. They’ve moved on, and whatever they found appealing about the BlackBerry ecosystem in the past—such as BBM, which is still the best texting program out there—they have found they can live without.

A related issue here is cost. I was poking around the T-Mobile store a few weeks ago (shopping for a Windows phone, incidentally) when I picked up the current generation BlackBerry Bold. Buying it outside of contract, it costs over $600.

Seriously? $600…for the old, clunky non-BB10 edition? What will a new one cost? For consumers to give BB10 a chance, it will have to be aggressively subsidized and pushed by the carriers. Will they? All major carriers have pledged “support.” We’ll see what that means in practice.

RIMM’s share price is soaring today on comments from CEO Thorsten Heins that the company’s strategic review could include selling off its hardware production or licensing its software. I argued a year ago that RIMM could have a bright future as a services company by building on Mobile Fusion. It could essential follow the path of IBM and become a high-end services company rather than a gadget maker.

But a year later, it’s still nothing more than speculation. And with RIMM no longer dictating terms, carriers have started to push back on the licensing fees for BlackBerry Internet Service and Enterprise Server.

And who, pray tell, would buy RIMM’s hardware business? Or more importantly, license BB10 as a manufacturer? Samsung? Nokia? Probably not; both have made large commitments to Android and Windows.

RIMM doesn’t have a lot of time. It’s bleeding cash, and it isn’t expected to turn a profit this year. For RIMM, BB10 must be a rip-roaring success. Failure means irrelevance and death.

And let’s not forget one last point. RIMM is not really competing with Apple or Google right now. It’s competing with Microsoft to be the third platform.

It is in everyone’s best interest to avoid an Apple-Google duopoly. Consumers, manufacturers, and carriers all stand to benefit from more competition. But I’m betting that it is Microsoft that pushes its way in, not Research in Motion. Microsoft is starting with a clean slate and a fine operating system that any manufacturer can license. There is no baggage and no cumbersome technology arrangements (think BIS and BES) with which to contend.

Samsung is set to launch its ATIV Windows phone (essentially a Galaxy that runs Windows instead of Android) in the United States about a week before BB10 hits the market. We’ll see which ends up making a bigger splash.

I wouldn’t be too quick to short RIMM at the moment. It’s simply too hot to touch. But once the new release hype has run its course, RIMM could be an absolute feast for bears.

Disclosure: Sizemore Capital is long MSFT.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the chief investment officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.

Visit Charles Sizemore's Website

Rating: 1.7/5 (20 votes)


Batbeer2 premium member - 4 years ago
Thanks for an interesting article.

Some thoughts:

I have absolutely no idea what BB10 can or will do. My crystal ball is a bit murky today. What I do know is that this company has about 80 million users (BIS and BES). They pay serious money for access to the services.

What's that worth to a strategic buyer?

Again, no idea.

1) I do know I would pay $ 4 billion for that business in a heartbeat.

I reckon each subscriber brings in $ 50 of cash earnings per annum (after costs). I know what my company pays for the BB services and I think $ 50 is a pretty pessimistic estimate. We have some 10 000 users now and will add another 20 000 in the next two years.

If I spend $ 0 on Capex and R&D, I figure I'll have about 0 subscribers by 2015. I may be off by a couple of years but I know I'll rake in $ 4B this year, so that's what I'll pay.

2) Last time I checked, RIMM had an NCAV of $ 4 billion.

Since the company is currently selling for about $ 8 B, investors are getting the portfolio of patents, the car business (QNX virtual dashboards) and A LOT of PP&E for free. RIMM has been spending billions on Capex and R&D and it's being valued at $ 0.

In short, it seems to me the current price implies BB10 fails spectacularly.
Ramands123 - 4 years ago    Report SPAM

"RIMM doesn’t have a lot of time. It’s bleeding cash" ....This statement is completelty false.

You can look at the cash flow from operations and the cash build up they had in last 4 quaters.

Earnings are negative which have lot GAAP based calculations but thier cash is positive and increasing.

Really... do you want to bet against intellegence of Prem Watsa.. Good luck to you and bears of RIMM.
Mocheng premium member - 4 years ago
Don't blindly conclude RIMM's death, the shares are up because BGR just came out 100 screenshots of what BB10 OS, and it looks AMAZING.

Robbieboggie - 4 years ago    Report SPAM
This author does not know what he is talking about. Clueless sheep.Laughable analysis.
Sapporosteve premium member - 4 years ago

I hold RIM and I am up 70% so far.

I disagree with Charles. However, you might want to read some of Charles' articles on Europe and Greece and Spain. I took up some of his suggestions after doing some of my own research and they are performing very nicely.

Maybe as a sheep with a lots of clues, you can add some value?


Robbieboggie - 4 years ago    Report SPAM
I suggest Charles read the winning piece in the value competition last here on Gurufocus on RIM and add this technical report (understand the laws of physics) and focus on page 11 (he is clueless): http://stks.co/r0Xt

I hold the 10 cent jan 2014 calls from last year.
Kfh227 - 4 years ago    Report SPAM

Skimming, skimming. Not a single note on international markets. Just another article that thinks the USA is 100% of the smartphone market. For example:

"Rumor also has it that BB10 will have the best auto-correct and word prediction, which are valid selling points for a touchscreen phone. But will that compel a customer to choose a BlackBerry over the newest, snazziest Samsung Galaxy? I’m thinking no.

Well, seeing that auto correct and word prediction can be used seemlessly accross 3 different languages, it is a big deal in countries with more than 1 primary language (*cough* USA *cough*)

Another negative article that shows that the author knows about 10% of the information out there. That 10% being the USA.

Convenient that the user ignores pre-order info for the BB10 in Canada which is doing "betterthan expected".

Another sign of lack of research:

"And who, pray tell, would buy RIMM’s hardware business? Or more importantly, license BB10 as a manufacturer? Samsung? Nokia? Probably not; both have made large commitments to Android and Windows."

Well, nop, how about GE or Frigidaire? BB10 is based on an established operating system called QNX. QNX is perfect for the oven of the future. BB10 features just make it easy to make a HUI for an oven (Human Machine Interface). Not sure how ovens would use BB10 tech but how many people forgot if they left the oven on. Everyone has done it. Imagine being able to check and turn off your oven via phone. Licensing is not necessarily smartphones. Licensing is a "strategic alternative"
Kfh227 - 4 years ago    Report SPAM
I will sell my calls (up over 1000%) and go short the second I read one compelling article against BB10 that speaks to the international market. Till then, all these articles are focusing on the USA only which is an established market a quarter the size of a place like India which is emerging.
Robbieboggie - 4 years ago    Report SPAM
Page 16 has the million dollar picture you are looking for. Spectrum Demand vs Capacity.
Oneinfiniteloop - 4 years ago    Report SPAM
Charles, lets circle back in about couple of months and talk about this. Just go and scan the entire Guru list and see if a single "Guru" on that list has taken a short position - that says something.

In the next 2 years even if the existing base of Blackberry diehard users convert to Blackberry - Blackberry would be doing great. Also remember that 65% of it is held by the institutions and 15% is held by employees and the % owned by institutions is going up not down. The total float available is only about ~100 million and the last time I checked it has close to 134 million shares shorted - you do the math. With only ~500 million share outstanding out of which 80% are locked all you need to do is look at AMZN to check out the possibilities.

Going forward RIMM is not going to be just about a Smartphone - BB10 is laying out a platform with a much, much broader vision.
Robbieboggie - 4 years ago    Report SPAM
Let’s forget about sentiment for a sec and look at Blackberry fundamentals.

- 2012 Net Income was $(869.0), but included in this: $690 mil goodwill writedown, and restructuring charge of $316 mil. Add those back, earnings are $137 million, or +$0.26 per share. Not good, but enough to stay on life support. The increase in cash & equiv from $1.7 to 2.7 billion from 2011 to 2012 suggests they are not burning cash to cover losses, and have been chugging along with modest means, but sufficient to keep them going without any debt or government life support.

-In most recent quarter ended, 6.9 mil bberries and 255k playbooks were shipped for quarterly revenue of $2.7 billion and operating margin of $830 mil. In the whole world, roughly 419 million mobile phones (all brands) were sold in Q2 of 2012 (25% of which are smartphones, though USA ratio is 50.4% smartphones), so using 419 mil as a conservative estimate for upcoming quarters, I will assume 1.676 bil global mobile phone sales per year (all brands, all types). Rim market share of 2012 Q2 sales was 1.65%.

- gross margin in 2012 was 31%, down from 44% a few years ago (and 36% last year). BB10 is a new product, so hard to say what its margin is. will conservatively assume 38% since 31% is the margin on their old phones, and BB10 is selling for a lot more. They cost $600, so operating margin is assumed to be $228 per phone.

- Operating Expenses were $4.2 bil in 2012 and 4.6 in 2011. Will probably increase in 2013 for increased marketing efforts (so boosting to $5 bil somewhat arbitrarily)

- Customer base is 79 million current bberry users globally. Assuming only 1/15 will upgrade this year implies ~5.3 mil unit sales in 2013 from ONLY current bberry users. If an ADDITIONAL 1.5% of the 1.676 bil 2013 sales can be captured, then that's 25.1 million more BB10s, so add the 5.3 mil from the bberry faithful, and that = 30.4 million BB10s, totalling $18.3 bil revenue and $6.9 billion gross margin (again, assuming 38% operating margin, which is probably conservative).

- If operating expenses are indeed $5 billion, that means before tax profit of $1.9 bil (6.9-5=1.9) before sales from playbooks and older bb models have even been considered. Obviously the demand for those products is dropping and being cannibalized by BB10 sales, so in an effort to be ultra conservative, will assume 6.9 mil older bberries and 255k playbooks for all of 2013 (equal to just one quarter of results from 2012), and this will add margin of only $830 mil (again, VERY conservative). 1.9+.83 = $2.73 billion Earnings before tax, which is a whopping $5.23 per share. Their tax rate is 23.5% (federal 12, provincial 11.5) but they have built tax shelters from losses. Ignoring those though, EPS would be $4.00, which would easily justify a share price of $40.00 using a 10 x trailing P/E (conservative for a tech company, goog is like 23 or something).

These numbers are realistic IF these things happen, but here are the ifs:

- will 1/15 bb users actually upgrade? will it be 1/20? 1/25?

- is the gross margin really 38% what if it's only 30%?

- 1.5% of global mobile phones is equivalent to 6% of ALL smart phone sales. Is that realistic? can they get 10% What if it's only 3%?

- Will operating expenses be $5 billion? Alicia Keys and the superbowl don't do charity, not for bbry, anyway

Using the assumptions that I made above, (ie 38% BB10 margin, only $830 mil in profit margin contributed for 2013 from incumbent products, etc), the number of BB10s that have to be sold in order for bbry to break even is 18.3 million (equivalent to 1.1% of all annual mobile phones sales, or 4.4% of all annual smart phones). Keep in mind that i;ve used conservative assumptions. 38% margin is probably light, and I doubt incumbent BB product sales will shrink by a factor of 4 in one year. Nevertheless, this paints a more quantitative analysis of what BBRY is up against than some analyst making lame talking points. In my view, product reviews have been good, so a 1/15 upgrade rate for current bb users is a reasonable assumption, and a 6% share of new smartphone sales doesn't seem out of line when you're only up against 3, maybe 4 real competitors.

I have simply one thing to say to all clueless Analysts or negative Journalist. This stock is bound for the Mother of All Short Squeezes. PERIOD.
Buynhold - 4 years ago    Report SPAM
Well, what do you know? Blackberry just received what looks like a takeunder bid (I am guessing, close to its liquidation value) from a Fairfax-led private consortium at $9/share.

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