Research In Motion (RIMM), once a titan that dominated the smart phone space, has had its stock stuck in a mire since the 2008 peak. Despite a phenomenal earnings growth rate averaging 56% over the last 5 years, and similar sales growth rate over the same period, the jet is stuck in taxi and can't seem to find the runway.
Financially speaking, RIM is in extreme undervalued territory. The stock has a P/E of around 8, so with an estimated future growth rate of >20%, it is trading near 0.4 PEG. The company has no long term debt to speak of, and net cash of around $7.5 per share. It recently released weaker than expected Q1 guidance due to massive technological transitions underway, causing the stock to drop nearly 11% the day after the announcement. Despite posting excellent results for the year earnings-wise, its declining gross margin suggested bigger underlying problems, which scared away investors
The root problem is that the BlackBerry used to be a status symbol. It was big, clunky, and expensive, but carrying one almost always signaled that you were some corporate hotshot or banker who was important enough to carry your work with you. BlackBerries used to be elite/exclusive. They now desperately need to rekindle that love and feeling. To do that, RIM needs to refocus on its core competencies.
Differentiate (Let Toys Be Toys)
BMW does not try to match Toyota (TM) or Hyundai (HYMLF.PK) feature by feature. BMW does not price on the same level as them either. A BMW sedan does not run twice as fast as a Hyundai, nor does it have twice as many features, but the company certainly can charge twice as much. BMW differentiates itself by positioning as a premium brand through a combination of marketing efforts and elevated quality. However, the quality that BMW has over its competitors is only incrementally better (in some areas, not even) and does not justify the price premium cost-for-cost; nevertheless, consumers pay and the company pockets the difference via a fatter margin and bottom-line.
Similarly, RIM needs to insert some independent vision into its strategy and stop chasing Apple's (AAPL) tail. Instead of appearing to play "catch-up," their marketing efforts need to frame the discussion to their advantage. Call it as they see it: iPhones and Android (GOOG) phones are toys for kids; grown-ups use BlackBerry. BlackBerry should steer the discussion towards what busy professionals and businesses need in their devices - security, durability, long battery life, low data usage (good compression), and enterprise integration.
Boring, you say? Don't be such a teenager. If I was a CIO, I would certainly appreciate it if the corporate data bill wasn't astronomical because some employees play too many 3D games on their phones. I would not want to have to constantly replace large cracked touchscreens, or have my staff miss an urgent call because the device "ran out of battery."
I would like my mobile devices to integrate tightly with my Oracle (ORCL) or SAP (SAP) technology stack, with security being a foregone conclusion, and provide a boon to productivity - which is what these devices are supposed to do in the first place. Let others play with Angry Birds.
This is not to say that RIM should completely ignore all the sexy stuff such as UI improvements, apps, graphics, and speed. In fact, early indications of the next generation devices in their pipeline seem to have very promising snazz factor. Playbook's specs and multi-tasking abilities are superior to competing products (and it supports Flash!), and according to management, when its QNX-based operation system becomes available on its high-end smart phones in 2012 (or "Superphones" as they call them), it will be nothing short of ground-breaking.
Furthermore, we can expect some great UI work coming out of their TAT acquisition. And of course, the recent announcement that they will support Android apps greatly increased the universe of available applications on Playbook/BlackBerry.
However, while it's one thing to catch-up to industry standards in these area, it's quite another to focus on them as key differentiators. RIM is very uniquely positioned. It doesn't need to compete heads-on with the consumer smartphones under Apple's or Google's terms.
The point is that with proper positioning, RIM can afford to be one step behind in bells and whistles. However, they must absolutely dominate their core areas of competencies, which are, I repeat - security, durability, long battery life, low data usage, and enterprise integration.
RIM is already world-beating in most of these areas. They have a solid reputation for security, and they are constantly creating new innovations in that area such as the separation of corporate and personal data. BlackBerries have good data compression, place less strain on networks, and the carriers love them. Enterprise integration is by far their widest moat; I will cover this in a later section.
RIM needs to "embrace and extend" these advantages to get even further ahead of their competition. These are where their most advanced R&D should be done, and where their marketing dollars should be spent. The key of all of this is in branding. BlackBerry is an enterprise-grade device; don't get distracted by the side-shows that are iPhone and Android.
RIM as a company should focus on building solid professional phones and compete less on bells and whistles. They could position themselves as a premium brand generally used by corporate types, even if barely accessible to consumers. This may even generate an aura of exclusivity, allowing RIM to charge a premium, but more on that later.
Leverage and Extend Corporate Domination
RIM is not just in the business of selling mobile devices. To fully entrench themselves in the corporate IT world, they need to have their paws on the entire server/middleware stack, using their popular mobile device as leverage.
With the fully integrated BlackBerry Enterprise Server (BES) already deployed in most major corporations, and their recently released Enterprise Application Middleware, RIM is moving in the right direction. However not enough marketing or fanfare was ever generated for their back-end products, so the media is predictably distracted by the latest gizmos on the front-end device. Unfortunately, too many R&D dollars are probably being diverted as well.
Enterprise mobile is where RIM has a sustainable advantage. This is their bread-and-butter; their moat. They cannot afford to neglect it. This is why I believe opening up BlackBerry Messenger (BBM) is about to become one of the biggest blunders they ever make.
As the rumors have it, RIM's logic for opening up BBM is to enhance the popularity of the application and leverage it into a "social platform," essentially going head-on against Facebook and Linked-In. This is a very crowded space, and if they do decide to proceed, it will turn out to be a big mistake.
What RIM should do instead is to keep BBM proprietary, but leverage it (and its back-end products) to build an enterprise social network. The first step would be to put BBM on company desktops/laptops. Then, use that as a stepping stone to build a full-fledged, secure, IT-policy-compliant social network.
By all measures, the corporate IM/social space is still largely uncharted. This is an opportunity that RIM is positioned very well to capture. This is their low hanging fruit, but some vision and creativity will be required to pull it off.
Price at a Premium
Whatever price they're selling iPhones at, RIM should price BlackBerry phones 50% higher. This is, of course, counterintuitive, but a premium must be paid for reliable, sturdy enterprise-grade phones. For example, consumers don't typically install Oracle software for home-use. But what would entice companies to pay a large premium for Oracle software over, say, open source databases or Microsoft (MSFT) SQL Server? Appealing to their needs and interoperating well with their technology stack.
A benefit of pricing the phones at a premium, besides being able to afford better memory, screens and processors without eroding margins, is that they can also apply more expensive material and finishing to the phone's casing. The phone should "feel" solid and expensive with an industrial flare.
All of this, of course, predicates on the phone actually being rock solid for professional use. RIM must be uncompromising in the core competencies that I listed in the previous sections.
It is true that most of RIM's recent growth came from selling cheaper devices to international and low-end markets. However, having a super-luxury line at the high-end is not inconsistent with having a lower-end line for mass consumption. BMW has their 1-Series. Even Toyota rebrands their luxury line as Lexus. One strategy could be to rebrand the lower-end BlackBerry as something else, and apply the BlackBerry brand to the luxury/enterprise line.
BlackBerry's brand should be associated with the image of successful corporate types, and appeal to psychology of the luxury segment: If you buy it for yourself as a consumer, it's not because you need it, it's because you have money to burn. Keep it slightly out of reach, and they will beat a path to your door trying to get it.
This might be the most roundabout way to reignite the consumer's passion for BlackBerry, but it is an option worth serious consideration.
Investment Conclusion
The strategies outlined above require some guts and creativity to pull off. However, even if RIM simply muddles along on its current path, its upcoming pipeline and its sheer business fundamentals already make it a good value play at these prices. If, with some luck, the leadership gets injected with a decent dose of vision, RIM could potentially turn from a good into a great investment.
Disclosure: I am long RIMM.
