The past week's events have certainly been scary for investors in Research In Motion (RIMM). With headlines declaring that "RIM Is Finished" and "Wheels Coming Off at Research At Motion," you'd think the company was on the verge bankruptcy, especially in light of the fact that RIM received at least six downgrades from Wall Street's typically optimistic analysts. In fact, according to the Toronto Globe & Mail, RIM's situation is so dire that it is putting the entire "Canadian technology 'ecosystem' at risk." All this doom and gloom originated from a single bad set of quarterly (pdf) results.
To be fair, it was a pretty lousy quarter for the company. While revenues were up 16% year-over-year (Y/Y) and Q1 earnings beat expectations, revenues were light versus expectations, and RIM sharply lowered its outlook for the next quarter and full-year fiscal 2012. RIM's growth appears to have stagnated with revenue expected to fall slightly in the upcoming quarter. Furthermore, RIM's new PlayBook tablet is struggling to make a dent in Apple's (NASDAQ:AAPL) market share. Certainly, the market is correctly interpreting this press release as very bad news.
That said, the market has, in its usual herd-like fashion, greatly overreacted. Analysts are already writing obituaries comparing RIM to other fallen phone manufacturers such as Nokia (NYSE:NOK) and Palm. But RIM isn't dead yet, in fact, its balance sheet is downright vibrant. According to the company's latest press release, it has more than $2 billion of cash and short-term investments. Its operations generated nearly a billion dollars of cash last quarter alone. The company has no debt whatsoever to offset against this mountain of cash.
The company also remains wildly profitable. It anticipates making between $5.25 and $6 a share in fiscal year 2012, giving the company a forward P/E of 5. Even companies thought to be in dying industries, such as newspapers, typically trade at higher P/E ratios. For a company in a dynamic industry such as technology, a forward P/E of 5 is insanely cheap.
RIM also benefits from having a very clean balance sheet with very little accounting risk. The company has very little in the way of goodwill or other other soft assets on its balance sheet that could get written down. The company has no debt, and accounts receiveables have been falling as well. Without any other obligations to hinder it, RIM has free reign to aggressively repurchase shares. It just announced another buyback that will repurchase up to 5% of the float.
No one is arguing that RIM's management has made the best moves in the past quarters. Clearly the company has lost its edge. Management has failed to adequately address investors' concerns. But all is not lost. The company still has a dominant brand, an enviable balance sheet and cash position, and the resources and capability to mount a turnaround. And with other weaker phone players falling by the wayside, RIM should be able to maintain market share even if it loses more ground to Apple and Google (NASDAQ:GOOG). And, unlike its domestic markets, RIM's international growth remains strong -- year over year international revenues rose 67% in the most recent quarter.
While RIM's earnings and revenues will not be able to grow significantly for the foreseeable future, the business isn't dying. If revenues merely stabilize at present levels, the company's shares will represent a compelling value. With a P/E in the 5s and a continuous buyback program, RIM will be able to dramatically shrink its float. And if Apple or Google should face a technoligcal setback of their own, RIM may be again be able to become a growth-oriented company. With billions of dollars of cash on the balance sheet, RIM has time to refocus its R&D. While stagnant sales and revenue are not desireable, RIM is not in a race against the clock, it has plenty of resources to withstand current competition while designing new products that can revive the BlackBerry brand's vitality.
While RIM shares could certainly still fall more before hitting bottom, particularly if Wall Street continues to hurl more negative rhetoric at the company, the future should be bright for RIM shareholders. The RIM story is far from finished. The company has had a rough transition from being a growth-oriented stock to a value stock, but following last week's carnage, it has finally finished the transformation and become a true bargain. With RIM's tremendous operating cash flow and share repurchasing program, investors have a large margin of safety. Unless RIM's brand, patents, and R&D program have virtually no value, RIM shares should rebound from current depressed levels.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIMM over the next 72 hours.