Research In Motion (RIMM) shares finally snapped out of their long slump with a rousing 10% rally Monday in the wake of Google's (GOOG) unexpected bid for Motorola Mobility (MMI). Google's $12 billion offer puts a huge 63% premium on Motorola Mobility -- far more than one might expect for an all-cash deal. It seems that Google was particularly interested in Motorola's patent portfolio, given Google's recent legal struggles with Microsoft (MSFT) and other rivals.
After a decent morning rally, shares of Nokia (NOK) and RIM really took off in the afternoon as investors started to consider the potential ramifications of Google's deal. Research In Motion, in particular, has a huge patent portfolio that could be up for sale at the right price. But the naysayers came in almost immediately, with CNN writing up an acerbic post chastising investors for buying into Nokia and RIM in the wake of the Motorola buyout. It suggested that RIM shares would retreat after the merger hysteria died down.
RIM is still a company with numerous obvious products. There is no need to rehash the extensive bearish articles that SA contributors Cameron Kaine and Rocco Pendola, among others, have written, other than to say that a buyout of Motorola will not boost the Playbook's weak sales, nor will it speed up RIM's plodding calendar of new phone rollouts. RIM bears can continue to make the case that the company is still floundering as it loses market share under arguably inept management.
However, RIM's bears are missing the bigger point: buyers in RIM are no longer here because they have great faith in management, nor because they are confident the new products will take back great amounts of market share from Apple (AAPL). At this point, RIM is being bought up because it is a deep value play (or a tantalizing value trap.)
I laid out the numbers in my first article; RIM has a ton of cash, a 5 P/E, and despite stalling revenue growth, the company continues to be a cash flow generation machine. With the company's aggressive stock buyback program continuing, the float will continue to shrink as the company monetizes its existing products and market share.
Even if the company never produces another successful product, the company is still worth its $2 bilion in cash plus its cash flow generation of nearly a billion this year and hundreds of millions more over the next couple years (admittedly at a declining annual run rate). Add the patents and brand name into that and there is not a whole lot of downside in RIM. In a business failure sort of scenario, the company is probably still worth $15-20 a share if the company were to suspend R&D, give up on the future, and only generate as much cash as possible out of existing assets before closing up shop.
As I see it, that simply is not enough reward for bears to take the risk of shorting RIM. There are so many potential triggers that can pop RIM higher. The company's strong international growth could continue, refocusing attention away from sagging domestic sales. The Playbook tablet could catch on with consumers (not especially likely, but not impossible). The QNX platform could bring RIM right back to the top of the heap in smartphones. RIM could be taken out whole by a suitor such as Oracle (ORCL). Or the company could be split up, with the patents being sold off seperately to monetize that valuable asset.
The bullish case for RIM remains in tact after today's sharp bounce. The company still has a bunch of great assets including brand name, a huge cash hoard, patents, increasingly solid international market adoption, and the upcoming QNX platform as seen in the upcoming Colt phone. Unless the company fails entirely to successfully monetize any of those opportunities, the stock is likely to trade higher. With interest rates increasingly approaching zero, the appeal of buying a company at a 5 P/E that is aggressively buying back its stock continues to grow. Think of RIM as a high-yielding investment that has a substantial upside kicker should it be bought out or if management successfully turns around the brand.