I will admit cold-heartedly that I enjoyed the Research in Motion (RIMM) rally recently with immense joy. The stock went to as high as 14.14 before falling back down to 10.91 due to an earnings report. It was amazing and you could have imagined the way I was calculating the paper profits generated from this stupendous move. I knew that RIMM was going to be a volatile candidate.
The company's recent earnings report was, while on a profitability standpoint poor, better than expected. Cash increased once again to 2.9 billion due to the reduction in both accounts receivables and inventory. As of this writing, the company still has 400 million and 2 billion in both inventory and accounts receivables respectively. From that viewpoint, the company's cash source will remain still, while the service revenue profits power the daily operations of RIMM.
Now, how did the stock go from 14.14 to 10.91 in one trading day? Well, the public is spooked about the service revenue. Thorsten came out and said that they will change the fee structure of BlackBerry 10.
While at first glance this will impose a lot of risk to both RIMM's intrinsic value and share price, we must understand that they had no other choice but to change the fee structure. If you look at the current smart phone offerings, a smart phone could cost you $99 - 300. Apple's (AAPL) iPhone sells for $200, and this price is extremely attractive, because most typical Apple products sell above and beyond that price point. Now if RIMM introduces the BlackBerry 10, and if they expect the same pricing structure, then essentially, the decision boils down to which phone is inherently better. If the BlackBerry cost an extra $5 or 10 per month on data plan, I am almost certain that consumers will look away and buy the Apple products. One way that BlackBerry could differentiate itself is to make the data plan cheaper for consumers. By offering the carriers the availability of their servers, RIMM could take some burden off the carriers while also providing the consumers with the same service.
If the pricing structure comes out to be $5 - 10 cheaper on plans, because of RIMM's commitments, then there's a high possibility that they can win back customers. Because if we think about this situation from a consumer point of view, iPhone data plans cost an arm and a leg. It costs nearly $70 - $150 for a data plan and the carriers sometimes lose money on them due to the massive amount of usage. If RIMM has the infrastructure capabilities to both help and subsidize carrier costs, then it makes ample amount of sense for them to price BlackBerry data plans the cheapest. I honestly wish this to be the case, but if in the end it's not viable then it was good food for thought.
As a RIMM investor, what scares me the most is the fact that the service revenue is unknown going forward. I have always told people that the service revenue is the only reason RIMM hasn't been bleeding cash, but Thorsten was quick to remind the world that the current service revenues will not go away anytime soon.
If we think about this logically, it does make sense. Last quarter, service revenue decreased 3%, while the subscriber based decreased from 80 million to 79 million. What we do have to be mindful of is the amount of smartphones they sold last year compared to this year. If we look at it purely from a consumer point of view, it is almost a rip-off to purchase a BlackBerry Bold 9900 for the same price as an iPhone. The BlackBerry Bold 9900, while in my honest opinion is a decent phone, lags far behind an iPhone. I for one, even as a RIMM investor, would not give up the functionality of an iPhone for a Bold 9900.
That aside, the mere fact that they still sold nearly 6.9 million phones boggles my mind. What makes me even more intrigued is the fact that they haven't had a new phone for the last two years. If we look at sales data from 2010 to 2011, this was a period where RIMM introduced the Bold 9900. The amount of smartphones shipped in quarter 3 of 2011 (which is really 2010) was 14.2 million and had revenue of 4.484 billion. This number indicates that even though the iPhone 3Gs was immensely popular, RIMM was still able to have a foothold. Although the foothold might not be as strong, they still had something in the smartphone world.
Now if we take a look at quarter 3 of 2012 (which is really 2011), they shipped 14.1 million phones with a revenue of 4.081 billion, which tells the investors that they cut their price point by at least 10% to attract users. With this price decrease, their EPS also went down with it. This year's quarter 3 had smartphone shipments of 6.9 million that generated revenue of 1.627 billion, which tells the investor that they cut their price offerings by at least 25%, which is resulting in negative hardware margins. This price cut from a competitive landscape perspective is warranted because of the sheer competition out there. If a consumer can buy an iPhone for the same price as a Bold 9900, why would they buy a BlackBerry which has less functionality? It is simple logic, and I don't blame the management team for doing so.
Now the real question is whether BlackBerry 10 will be able to at least regain some of RIMM's glory days back. My answer to that is I don't know. I honestly think no one knows at this point in time. Blackberry 10 is only a month away and from the reviews I've seen, while I may be a little biased, it seems positive. I'm not going to discount the fact that the people who are reviewing the phones right now are BlackBerry lovers, but it is comforting to hear the positive reviews.
But if we simply take a look back at the competitive landscape from 2010 to 2012, for RIMM to even sell phones in comparison to the iPhone and Galaxy should warrant some kind of consumer brand loyalty. They do, in the midst of this heavy competition, have 79 million subscribers. The fact that can they stay relevant to the market is a question all by itself. But what I want to emphasize is that if we take a look at the 2010 data, for RIMM to sale phones with iPhone already on the market should bring about a whole new thesis. Nonetheless, if BlackBerry 10 can at least bring about some of the features iPhone has and more, more sales should be warranted if we take a look at smartphone shipment data from 2010 to 2011.
Who are the people buying BlackBerry phones? Frankly, I don't know. If we compared the iPhone to BlackBerry, there's no comparison. While I know there are a lot of people out there who are going to disagree with this point, the fact that BlackBerry smartphone shipments have been going down year over year is an illustration of this. Personally, I can't live without my phone and I check it constantly. For further disclosure purposes, I plan on buying a BlackBerry 10 the moment it comes out. I do believe that RIMM will at least return to its 2010 and 2011 days where it generated nearly 1.67 EPS quarterly. If we simply look at that, the stock could trade sixty-something in the next ensuing years.
I am long RIMM, and the only reason I bought it was because it was below its net/net value of 6.57. However, after researching the history of RIMM and looking at past data points, it brings about a whole new insight that many are overlooking. If we think about their profitability from a peer perspective, then they fall far behind Apple by a gazillion miles. But if we look at them from a niche point of view, they might just warrant something valuable. I do have to admit that I love my Apple products. The ecosystem built around Apple is sort of like a barrier to entry. It's going to be hard for RIMM to steal customers away from Apple because of the ecosystem. RIMM however does have a chance to gain new customers, which would warrant its relevance once again, and let's not forget RIMM's loyal customer base which I'm almost certain will purchase these phones! If you think RIMM could at least return back to its 2010 and 2011 days, then RIMM isn't too far away from profitability.