Many people like to bring up the point that Research in Motion (RIMM) is the next Palm. The reasoning they use to back that up is the fact that the operating systems have "some" resemblance. The Palm Pre provided a hub where people were able to check all of their statuses in one single area similar to that of the upcoming BlackBerry Hub.
What does that have to do with the two being in the same boat?
In Daniel Kahneman's bestselling book "Thinking Fast and Slow", he describes that people tend to correlate things that are completely uncorrelated. To give an example, he uses the fictitious character Linda, whom he describes as a philosophy major graduate, actively participates in anti-nuclear demonstrations, and is outspoken. He then asked if Linda was more likely to be a bank teller or a bank teller who participates in the feminist movement.
The majority of the responses were the latter one. However, that does not make any sense. The probability of being a teller is a designated percentage, but the probability of being a bank teller and a participant in the feminist movement will make the probability go even lower.
This is similar to the mindset people have on RIMM. The occurrence of a Palm scenario was already a once in a while occurrence. People tend to attribute things that make up for a "good story" rather than use logic and evaluate the situation sensibly.
The reason we have this mindset has everything to do with the way we like to explain things. People like to put a cause and effect story behind everything. Take a look at the recent run up on RIMM, the media constantly pounds the fact that it is up nearly 100% over the last three months. How come they don't stop to think that perhaps RIMM was extremely oversold? Another example would be last Friday's run up of 13%. People on CNBC were all trying to figure out why the stock was moving up, and many of them attributed it to the warming sentiment around investors.
These are just two quick examples to demonstrate why people are irrational most of the time, because cause and effect can be interpreted in stupendous ways.
I was so sick and tired of hearing the RIMM and Palm comparison story that I went back and read Palm's annual reports.
Just take a look at these financials. They are horrendous. Palm had only made money in 2005-2007. They've never made any money after that.
The majority of Palm's revenue came from the U.S. with little to no exposure to the international market.
Now let's take a look at Palm's balance sheet prior to the release of Palm Pre.
|Current Assets||(in thousands)||(in thousands)|
|RIMM (Q3 of 2012)||Palm (May 31, 2009)|
|Cash and Cash Equivalents||$ 1,910,000.00||$ 152,400.00|
|Short term investments||$ 821,000.00||$ 102,733.00|
|Accounts Receivable||$ 2,174,000.00||$ 66,452.00|
|Other Receivables||$ 366,000.00||$ -|
|Inventories||$ 457,000.00||$ 19,716.00|
|Income Taxes Receivables||$ 333,000.00||$ -|
|Other Current Assets||$ 478,000.00||$ -|
|Deferred Income Taxes||$ 217,000.00||$ 174.00|
|Prepaid and others||$ 12,104.00|
|Assets held for sale||$ 70,000.00||$ -|
|Current Assets Total:||$ 6,826,000.00||$ 353,579.00|
If we take a look at the current assets of the two companies, one can quickly realize that Palm was in no way comparable to RIMM prior to the release of a make or break product.
- Cash and Cash Equivalents, RIMM has 1.9 billion compared to Palm's 152 million.
- RIMM's short term investments alone dwarfs Palm's balance sheet.
Now let's look at Palm's liabilities.
Palm had 390 million in long term debt, RIMM has none. The cash on hand was barely enough to cover that amount. Because the company was actually LOSING money, as we will see in the cash flow statement, they needed the cash to cushion against any turbulent measures.
Take a look at this operating cash flow statement. This is the true determination of if a company made or lost money in a fiscal year. Palm generated a whooping -188 million in fiscal 2009; RIMM had a positive operating cash flow of 2.9 billion. If operating cash flow is negative, that means the company is really losing their cash on hand.
Inevitably, a poor balance sheet and inferior products led to Palm's takeover price of 1.2 billion by HP(HPQ).
Now, how can any rational human being compare RIMM to Palm? The comparison here isn't anywhere close.
This was the worldwide market share from 2004-2006. Palm was only 5.5% of the market shipping only 1.2 million phones. RIMM was only shipping 1.8 million back then compared to the 7.9 million shipped today.
I can reasonably say with a high degree of confidence that RIMM's current subscriber base of 79 million exceeds Palm's then subscriber base.
Then we have the business customer and there's no one else better suited to tell you RIMM's current position with its business customers than the man himself, Thorsten Heins:
"As some pundits write RIM's obituary, the company's global subscriber base continues to grow, to more than 78 million people in 175 countries. In many of those countries - some of the fastest growing markets in the world - RIM is the top smart-phone; and in some, RIM devices account for the top three spots. We have relationships with 650 carriers around the globe; RIM's reliability and security make it the first choice for countless government agencies and are part of the reason more than 90 per cent of Fortune 500 companies deploy BlackBerry in their enterprises." (You can find the link to his article here.)
RIMM's relationship with those 650 carriers will be a key factor going into the future. Palm had an exclusive deal with Sprint (S). Sprint is the fourth largest carrier in the U.S, and their subscriber base is nowhere near that of AT&T (T) and Verizon (VZ). As RIMM has been saying all along, if the carriers support BB10, then it will have a way better shot at gaining back market share.
As you can see from the data, there's no similarity between the two besides the fact that they are competing with Apple's (AAPL) iPhone. We must take RIMM's current position into its own scenario rather than correlating it with that of Palm's. The financial prospects and business prospects of Palm was much more negative than that of RIMM's.
I might be biased because I'm long the stock, but I sincerely believe that I have thought about this situation from a logical standpoint. The data points all point to a much more probable occurrence for RIMM to regain market share. RIMM will be able to market and advertise the BB10 with its substantial cash position. Along with that, the carrier relationship will strengthen the push. On the other hand, Palm had an exclusive deal with sprint and their balance sheet was terrible, which in the end leads me to believe that the comparison between RIMM and Palm is completely illogical.
Disclosure: I am long RIMM.