Research In Motion Is Trading Off Hope

| About: BlackBerry Ltd. (BBRY)

Over the past calendar quarter, Research in Motion (RIMM) shares have nearly doubled off their $6.22 nadir towards today's $12. This recent action includes a multi-month high of $14, which was established last December 17. On December 20, Research in Motion stock lost more than $3, in what calculates out to be a 23% loss. This immediate collapse was largely due in part to the company reporting revenue far beneath Wall Street expectations. Research in Motion posted losses because this business lacks a viable product to effectively compete against the dominant Apple iOS and Google Android operating systems.

Proponents of any turnaround must acknowledge the idea that Research in Motion executives must now labor directly against the Nokia (NYSE:NOK) - Windows ecosystem to field a third option within today's smartphone matrix. Shareholders are banking on the looming release of BlackBerry 10 to help resurrect the Research in Motion business model. Investors are effectively trading stock off a hope and a prayer. Research in Motion stock is effectively a call option.

The Smartphone Market

On January 3, research firm comScore released its most recent mobile subscriber market share report. This survey averages data for quarterly period ending November 2012. According to comScore, Google (NASDAQ:GOOG) Android and Apple (NASDAQ:AAPL) iOS operating systems power 53% and 34% of all smartphones, respectively. On the handset side of the ledger, Samsung and Apple are also one and two on this list. At the bottom of the heap, Research in Motion BlackBerry, Microsoft (NASDAQ:MSFT) Windows, and Nokia Symbian operating systems effectively wage war over the remaining table scraps of the smartphone market.

In what is shaping up as a "winners take all" marketplace, the Apple iOS and Google Android duopoly continues to gain strength. Taken together, these two operating systems increased share by roughly 2% over the prior quarter, while Research in Motion share declined by 1% down to 7.3% of the market. Research in Motion and Microsoft engineers are both hell bent upon introducing telecommunications, computing, and entertainment ecosystems to market that can compete against Apple and Google.

As the smartphone becomes increasingly commoditized, brand recognition influences consumer behavior largely above all else. Apple and Google minimalist culture and artistry is synonymous with today's Web 2.0 movement and hipster movement. Alternatively, the Blackberry, or Crack Berry, is more so identified as a tool for the early 2000's technocrat. 2008 marked the pinnacle of the Blackberry hey day, when Research in Motion stock peaked at $141 per share. One year earlier, in 2007, Apple had released its revolutionary iPhone, largely to the mockery of brazen Research in Motion executives. Ironically, it is this very same iPhone platform that facilitated the staggering collapse of the BlackBerry Empire at Waterloo.

In a scathing critique, The Verge writer Jessie Hicks dismisses Research in Motion as a "technology company founded by an electrical engineer" that is too unwieldy to compete against chic Silicon Valley outfits that are consumer-oriented electronics businesses. In order to re-establish Main Street credibility, Research in Motion must win the looming showdown against Nokia.

Blackberry 10 Versus Windows 8

Research in Motion is set to release its BlackBerry 10 operating system on January 30. Technology enthusiasts speculate that Research in Motion will also introduce BlackBerry Z10 and X10 smartphones on the date of the new operating system unveiling. Industry insiders associate this latest line of offerings to retain the small keyboards, fast web browsing, and impressive security features that have become synonymous with the BlackBerry brand. According to David Frith and The Australian, BlackBerry 10 users can set up separate work and personal profiles for messaging, social networking, and voice calls. This latest BlackBerry 10 package will arrive equipped with access to more than 70,000 applications, which pale in comparison to the hundreds of thousands of programs that are available for Android and iOS platforms. Again, BlackBerry 10 is more so in competition with Windows 8 for the grand title of telecommunications industry third wheel.

Windows 8 product reviews and sales figures remain mixed, despite all efforts from the Microsoft marketing machine. While the Apple iPad continues to sell like hotcakes, the Microsoft Surface is literally a non-factor within the tablet market. Earlier this month, J.P. Morgan analyst John DiFucci slashed financial estimates for Microsoft, upon concerns of weak Surface and personal computer sales. In retrospect, Windows 8 may be dismissed as a flop, as it has failed to engineer a competitive ecosystem. Consumers will now evaluate Samsung and Nokia Windows 8 smartphone offerings based upon individual merit, rather than pieces of a larger consumer electronics puzzle.

Unfortunately for Research in Motion sympathizers, the Nokia's Lumia remains the best bet dark horse candidate to challenge today's smartphone duopoly structure. Nokia, with the help of rapper Nicki Minaj, markets its Lumia as a fun and reasonably priced phone. Technical specifications for each edition of the Lumia are equal to, if not superior to popular iPhone and Samsung Galaxy offerings. A Wall Street Journal report, however, indicates that carries slashed prices on Lumia phones in the aftermath of weak holiday sales. This latest debacle at Nokia does not exactly bode well for Research in Motion shareholders.

The Bottom Line

In a sign of the times, Research in Motion recently paid Nokia $65 million to settle a patent infringement lawsuit. Without a settlement, Nokia's claims would have effectively banned the Blackberry 10 from coming to market. While Apple versus Samsung courtroom costs tally in the billions, the two millennial heavyweights war over a mere pittance. Wired dismisses these happenings as "sad."

On December 20, 2012, Research in Motion released its third quarterly report for fiscal year 2013. For Q3 2013, Research in Motion took down a small $9 million profit. This bottom line result is actually a sharp turnaround, as RIM has already recorded $753 million in losses during the prior two quarters. When broken down further, however, Research in Motion is still posting negative operating income prior to any provisions for tax credits. Last quarter, Research in Motion suffered $230 million in operating losses, as part of its $1.2 billion in operating losses for the year.

Most importantly, revenue at Research in Motion collapsed through fiscal 2013. For the three months ended December 1, 2012, RIM recorded $2.7 billion in revenue, which is a steep decline from the year-over-year period, when the company took down $5.2 billion in revenue. Again, Research in Motion stock lost 23% in value the day this latest quarterly report was released.

Over the past nine months, Research in Motion generated $2.1 billion in cash flow from operations. This cash flow from operations trickled down to the $1.9 billion in cash on the RIM balance sheet. The Research in Motion $12.6 billion balance sheet also includes $3.1 billion in intangible assets and $2.5 billion in property, plant, and equipment, over top of $3.3 billion in total liabilities. Subtracting out the $3.1 billion in intangible assets leaves RIM with $6 billion in tangible book value, which is equal to its current market capitalization.

On paper, RIM appears cheap. A disastrous BlackBerry 10 release, however, would force investors to surrender at Waterloo amid another round of losses, asset write downs, and restructuring plans. Research in Motion shareholders now trade off hope.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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