FALLEN TECHNOLOGY SUPERSTAR
Research in Motion's (RIMM) groundbreaking technology and designs have undeniably etched the company's place in the technology landscape. More recently though, as RIMM struggles against Apple's (AAPL) hugely successful iPhones and their industry creating iPads, it may be easy forget that RIMM was also a technology trailblazer. They essentially created and popularized the modern smart phone. During the last 52 weeks, the stock has traded as high as $70.54 per share versus the current price of $29.77.
SMALL CHANGES COULD PRODUCE EXPLOSIVE STOCK PRICE UPSIDE
RIMM's steady decline is troubling and in the absence of real change, the company is in serious jeopardy. Make no mistake, the upside potential could be explosive! As such, we previously listed RIMM among "5 Stocks That Could Double in Price." The company currently trades at a trailing P/E 4.55, a forward P/E of 5.24 and a price/sales of 0.75. They trade with these dirt cheap valuations despite profit margins of 16% and sales growth of 33%. So much of the problem is related to sentiment that it would not take much to achieve significant initial stock gains.
Here are four things that could double Research in Motion's stock price.
1. Bring in new management: The steady decline in market share and margins have undermined investor interest in the former technology heavyweight. Real or perceived, the market thinks the management is resting on their laurels. While it is unfair to blame all of the company's current problems on Mike Lazaridis and Jim Balsillie, perception often becomes reality. Without a change in the management, it will be hard for investors to be confident in the stock.
Department store retailer J.C. Penney Co (JCP) is a great example of potential power value of a management change. J.C. Penney's stock price spiked 17.47% on June 14, 2011 following the announcement of a change at CEO. Their new CEO, Ron Johnson, was formerly the head of retail at Apple Inc.
Management changes have two sided effects. If an existing management is frowned upon, their dismissal would be positive for the stock. At the same time, if a new CEO is well regarded (as is the case with Ron Johnson at J.C. Penney), this is also a positive for the stock. As a result, as impressive as the 17.47% gain in JCP's stock price was following the CEO change, this represents only one side of the potential upside. Considering the increasingly negative sentiment surrounding RIMM's current management, the potential upside from adding the right CEO could be more than what we saw at JCP.
2. Produce new products that leverage their strength: RIMM may never have the design and marketing savvy to compete with Apple, but they have an undeniable strength in data security. RIMM would be wise to leverage this one important strength to produce new products.
For example, Google recently released their much hyped Chromebook cloud dependent netbooks. While the Wall Street Journal's review points to flaws that you might expect from a first generation product, what's more troubling is Walt Mossberg's warning that using a Google (GOOG) Chromebook means that you would have to trust Google with security and privacy. For Mossberg to even bring this up as a potential "problem," is a strong indictment against Google and a massive opportunity for RIMM which has a stellar reputation for security and privacy.
As is often the case, Google pushes the envelope but will likely find limited revenue opportunities for their efforts. These developments will likely have far greater implications for competitors. RIMM could generate upside for shareholders by following in Google's innovative footprints to produce cloud dependent mobile computing devices.
3. Bold acquisitions that tap into new markets - RIMM has a stronghold in the enterprise segment, but they have continually struggled to achieve the same dominance among retail users. Not only does a Sirius XM Radio (SIRI) acquisition give them an outlet into the retail markets, it also perfectly fits RIMM's ambitions of developing a presence in the automotive industry. This acquisition INSTANTLY gives RIMM an opportunity to tap into more than 20 million paying automobile based users. To put this number into perspective, Research In Motion's blackberry subscriber base was 41 million at the end of fiscal 2010. Any integration would be a huge opportunity to extend the reach of RIMM's QNX operating system as well as increase the "stickiness" of Sirius XM's product by offering additional functionality.
4. Bold partnerships to broaden their appeal - These partnerships do not have to be as explicit as the Nokia production agreement with Microsoft. They can be more subtle and relationship oriented like Netflix Inc (NFLX) CEO Reed Hasting's addition to the Microsoft Corp (MSFT) and Facebook Board of Directors. The current RIMM Board of Directors is somewhat closed off, with five of the nine board members directly affiliated with Research in Motion. More outsiders with relevant experience could improve the company's longer term strategic vision.
Reed Hastings, CEO of Netflix Inc. would be a great addition to the Board. Netflix receives a lot of negative press in the financial headlines because of the pricey valuations on the stock, but there is little doubt that the company itself is admired by many. Hastings could offer an innovative and disruptive influence in Waterloo. In addition, any strengthening in the relationship between NFLX and RIMM could improve the later's popularity with retail users.
James Crowe, CEO of Level 3 Communications (LVLT) would be a great addition to RIMM's Board. Crowe has long held a reputation as a visionary leader and technology genius. While the LVLT will be busy for the next few years integrating Global Crossing and other likely acquisitions, Crowe could bring the experience and vision necessary for a turnaround.
Daniel Hesse, CEO of Sprint Nextel Corp (S) has been an outspoken leader despite his company's struggles against other major wireless providers. As smart phone penetration increases and bandwidth increases, their is likely to be a secular shift in pricing power from mobile device companies like RIMM and Apple to bandwidth providers like Sprint. Hesse could provide some useful insights into these longer term trends.