What Is the True Value of Research In Motion?

| About: BlackBerry Ltd. (BBRY)

The chart shows the spectacular fall of Research in Motion (RIMM). There are 46 analysts that follow Research In Motion. With the exception of a couple of them, the analysts have been consistently wrong.

What is an investor to do, when a vast majority of analysts are wrong? The answer lies in turning to a new generation method such as our ZYX Change Method.

The analysts have been wrong not because they are not smart, not because they do not do their due diligence, not because they do not get enough information from the company, not because they do not get enough data from sources other than the company and certainly not because they do not understand the technology or the dynamics of the market place. Analysts are wrong because they are stuck in traditional methods of analysis that have failed not only in the case of Research In Motion, but have always failed in dynamic situations.

Analysts Use the Wrong Tools

The analysts rely heavily on price earnings ratio, growth rate, and EBITDA (earnings before income tax, depreciation, and amortization). These tools work well for static situations where there is a Gaussian distribution. The Gaussian distribution makes the first approximation to describe random variables that cluster around a single mean value. In a layman’s language, Gaussian distribution works well when there is continuity.

The problem with analysts is that they fail to recognize situations that do not fall within a Gaussian distribution. It is not their fault. The majority of the modern portfolio theory is based around Gaussian distribution and this is what is taught to our best and brightest in our business schools.

The ZYX Change Method is extraordinarily successful in part because it recognizes early on when a situation is not a Gaussian distribution.

For Research In Motion, the analysts have been modeling earnings of $7.50 per share. Prior to the earnings, the stock closed at $35.33. This is a P/E ratio 4.71. According to the analysts, this is dirt cheap. Not the most reputable analysts, but certain bullish gurus have been claiming that a growth stock like Research In Motion in a hot space like ‘mobile’ should trade at a P/E of 25. This implies a value of $187.50. No wonder these gurus have gained cadres of followers because the analysis makes sense. Such gurus further gained credibility by pointing to the large cash hoard at Research In Motion.

One analyst upgraded Research In Motion even Thursday prior to the earnings.

I have been fortunate enough to have founded two Inc 500 fastest growing companies. I have also been instrumental in the startup of over 50, mostly technology related, ventures. I am an electrical engineer and nuclear physicist.

I have never done anything even remotely close to the scale of Research In Motion, but on a smaller scale I have experienced similar situations several times. When a technology company loses market lead and then keeps on falling farther and farther behind the market leaders, the earning power starts to deteriorate rapidly. Let’s take the case of Research In Motion. Most were expecting $7.50 per share in earnings, now Research In Motion has announced that its expectation of earning is for $5.25 to $6.00. Today we expect several gurus to pound the table that even at $6.00 it is a P/E of only 5. The stock is now down $5.00 in the aftermarket.

The gurus will also point to the cash at Research In Motion and also proclaim its virtues as an acquisition candidate. Some gurus have been publicly advising that Microsoft (MSFT) should buy Research In Motion.

The gurus will be right only in one of the several possible scenarios.

Acquisition Scenario

The probability of Microsoft buying Research In Motion does not make much sense. All one has to do is study public statements by Microsoft and Nokia (NOK) related to their cooperation and the strategy of Microsoft as it relates to the acquisition of Skype, it becomes clear that there is not a technological or business reason for Microsoft to buy Research In Motion.

Google (GOOG), with the success of Android, certainly doesn’t have the appetite to buy Research In Motion.

Carriers such as Verizon (VZ) and AT&T (T) would not want to buy Research In Motion for the fear of alienating Apple (AAPL) and Google. Cable operators, such as Comcast (CMCSA) have their focus on content and are not likely to jump to Research In Motion’s rescue. If Comcast were to consider an acquisition in the wireless space, Sprint (S ) is a much better fit. Research In Motion has significant operations in Asia and Latin America where Comcast has no operations and thus no possibility of offering bundled services.

Satellite operator Dish Network (DISH) appears to be in the market for acquisitions, but it is better off engineering a merger with Direct TV (DTV).

Our analysis shows that there are not any obvious buyers of Research In Motion in Europe.

Indian and Chinese companies may have an interest but they tend to buy only when the assets are cheap. A good example is Tata Motors (TTM) of India buying Jaguar from Ford (F).

Our analysis shows that the Indian and Chinese companies will be attracted to Research In Motion at a stock price around $20.00.

The conclusion is that under this scenario, the value of Research In Motion is $20.00.

Major Restructuring

A major restructuring would involve replacing Research In Motion’s top management and cutting its work force by 70%. In such a scenario, Research In Motion would focus to become a market leader for those users where security is of utmost importance.

In addition, with the drastically reduced cost structure, Research In Motion will also have a good shot at becoming a market leader in low cost smart phones for emerging markets.

The Quantitative Screen of the ZYX Change Method shows a fair value of over $70.00 if Research In Motion succeeds in becoming a leader in the above described niches.

Present Path Leads to Failure

It appears from the conference call that Research In Motion is not ready to acknowledge that its house is on fire and plans to continue to make additions and remodel the burning house.

I have seen miracles happen before, and a miracle may happen again, but the most likely result is going to be continued market share loss and deteriorating earnings. The cost cuts that were announced on the conference call are nowhere near enough.

It is only a matter of time before the bloated cost structure starts eating into the cash hoard.

In a downward spiral, Research In Motion stock may end up around $12.00.

Present Path with Major Changes

The conference call shows that Research In Motion is not ready to undertake major changes. But if major changes were to be made, such as hiring away people from Apple (NASDAQ:AAPL), and leapfrogging to the next generation disruptive technologies while drastically changing the cost structure, the company has a shot at becoming successful as a smaller company. The probability of success in this type of transition is small but is doable. If such a scenario is successful, the stock may easily trade north of $100.00.

As my long time readers know, I rely on the ZYX Change Method. This stock is high on my watch list. I am likely to initiate a position and also give an actionable signal to subscribers of my alert services when all six screens of the ZYX Change Method are met. There will be an opportunity to make a lot of money on this stock – whether it be on the long side or the short side is still unknown.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional Disclosure: Some subscribers to ZYX Buy Change Alert are long on DISH. We have actionable signals on several of the stocks mentioned at prices different from their current prices. Based on the change in prices, I may have long or short positions in these stocks. Subscribers to ZYX Buy Change Alert and ZYX Short Sell Change Alert may initiate similar positions.