3 Reasons Why RIM's Stock Will Soon Double

| About: BlackBerry Ltd. (BBRY)

To describe his investment philosophy, Warren Buffett once said “I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”

I think this makes perfect sense as sometimes investors get caught in the rapture of their investments and try to out-smart themselves. I read articles constantly and get help, but notice that there is a perverse human characteristic that likes to make easy things difficult; pretty much what Mr. Buffett alluded to in his quote. One such easy decision was to get long RIM (RIMM) when it reached its bottom a week ago of $21. In that article, I said the following:

- If you have been following my articles over the past several months, you will see that I have been a long time bear of Research In Motion. I have called it the market’s falling knife as well as suggesting that its management come out with their hands up after holding the stock price hostage for most of the year. But I can’t help to realize that the company might have just reached its bottom at a price of $21.60.

- The stock price was just an arm's length away from my short target of $20 and seeing how it has bounced off of that price suggests to me that it may be time to take a second look at the stock. I am now bullish on the company and feel that most of the negative news has now been priced into the stock and more realistic expectations have been set regarding its recent struggles. I now have a new 12-month target on the stock of $30 and feel that it is now a tremendous value.

Here we are only two weeks later and the stock is already at $29.18 or less than 3% away from my $30 target. Clearly it is time to take a closer look at the valuation and try to dissect where the stock may be going. A lot has happened since I turned bullish, but the three most interesting events were Google’s (NASDAQ:GOOG) acquisition of Motorola Mobility (NYSE:MMI), Apple’s (NASDAQ:AAPL) announcement that Steve Jobs had resigned as CEO to assume the post of Chairman and Hewlett-Packard’s (NYSE:HPQ) decision to nix its smartphone/tablet efforts.

In down markets as investors have witnessed recently, there is one sector that has always been relied upon to eventually push the markets higher; that is technology. So far amongst a handful of companies, Research In Motion has more than contributed its share in the market’s effort to show signs of a resurgence. Shares of RIM traded up 3.4% on Friday to close at $29.18.

Sterne Agee analyst Shaw Wu on Friday upgraded the stock to buy from neutral as he also set a 12-month price target on the stock of $35, saying in a note that the company is “benefitting from arguably the strongest product cycle it has seen in some time driven by its new BlackBerry 7 OS.”

  • “While we continue to be concerned with the company’s longer-term fundamentals including risk of further margin compression and competitive risk, we see the company benefitting from near-term product catalysts,” Wu wrote.
  • The “mixed to positive” reviews being published of the new BlackBerry devices introduced this month is an improvement, writes Wu, from the distinctly negative reviews for the last major upgrade RIM did, the BlackBerry “OS 6″ models, and they are “worthy upgrades” for RIM loyalists, he notes.

I have to agree with Wu for his optimistic view of RIM, but also for a different set of reasons; most notably for the three events that I highlighted above. Let’s look at each more closely.

1. Google’s Motorola Acquisition

Google Inc. has agreed to buy Motorola Mobility for $12.5 billion or $40 a share in cash was in an effort to defend its Android ecosystem. Rising IP threats to Android from Microsoft (NASDAQ:MSFT), as well as Apple, were the primary driver of the acquisition.

However, in the near term, the challenges and distractions of integration as with the partnership involving Microsoft and Nokia (NYSE:NOK) could help RIM gain market share. Not only can this deal potentially deteriorate the hand of Android OEMs, but it may also place further strain various competitors to acquire what is known as "third platform" status.

When deals of this magnitude take place, it forces other companies to take notice and consider their own options in terms of synergistic advantages. As mentioned earlier, the Microsoft-Nokia acquisition, where it might have been once on the “warming burner”, may now be moving to “boiling”. But this now only makes RIM the most likely acquisition target. Consider that Google offered 60 percent above fair market value for Motorola Mobility, if using this as the standard, this would value a RIM acquisition of a per share price of close to $50; a significant premium above where the stock currently sits.

2. Steve Jobs Resigns As Apple CEO

I once agreed that RIM should acquire Sirius XM (NASDAQ:SIRI). I agreed that this acquisition was necessary primarily due to RIM’s struggling effort with its own music service. However, last week the investors welcomed the news that the company announced a new $5 a month cloud-based BBM Music service. There were also some intriguing revelations as subscribers will now be allowed to share songs with fellow subscribers. RIM will also allow users to select up to 50 songs per session which means the more BBM friends a subscriber has, the more music selections that will be made available to the user via the cloud; which by the way allows users to exchange up to 25 songs per month.

I think that is an interesting twist and interestingly it comes on the heels of Steve Jobs’ announcement. It is no secret that Apple, specifically the invention of the iPhone, has been the “death knell” of RIM. Obviously, Steve Jobs’ involvement in the day-to-day operations of Apple will remain constant. But the psychological advantage this news presents to Apple’s competition can’t be understated. With RIM’s music announcement and when one considers that Apple does not yet have a online music storage and sharing service, this puts RIM in the driver’s seat ahead of Apple possible for the first time in almost 5 years. Consider the possibilities for RIM or smartphone entry into the automobile dashboard, and one can see that this can translate into a significant advantage for the company.

3. Hewlett-Packard nixes tablet/smartphones

Hewlett-Packard’s CEO Leo Apotheker’s remarks regarding the company’s decision to discontinue its tablet plans, Apotheker said the following:

  • “The company needs to sharpen its focus and its consideration of options for its PC business. This realization came after his first nine months on the job, during which time he “examined each of the company’s businesses in depth” and “carefully considered the path forward.” However, one of the most poignant statements that I read was where the CEO simply offered, “The tablet effect is real and sales of the TouchPad are not meeting our expectations.”

He also said, “Due to market dynamics, significant competition, and a rapidly changing environment and this week’s news.” What did he mean by “this week’s news”? Was he referring to Google’s announcement? My gut tells me yes. If this is the case, HP is admitting that its acquisition of Palm, as well as its initial tablet plans were mistakes. This will only help RIM by eliminating another potential threat not only in the enterprise, but also in the consumer space.

I could not help but wonder how HP could be forced to make an acquisition of RIM to bolster exactly what it felt it had lost to Apple and Google. If HP is serious about being more competitive and returning more value to shareholders, then the company should consider an acquisition that will make it instantly one of the dominant players in the market that it is considering giving up on. HP should make a play for RIM.

Summary

Buying RIM at this point reminds me of what Mr. Buffett says is a “1 foot bar that I can step over”. In other words, it is now an easy decision. I think other companies such as HP and Dell should take notice. A RIM acquisition is not going to come cheap and I think it is only a matter of time for this to unfold as the signs are now on the wall. Opportunistic investors have already dialed in and bought RIM at the bottom and are now preparing for what can possibly be a double in the stock over the next 12-24 months. Clearly, in this market, not every technology stock will be a winner and the sector as a whole has a great deal of promise over the long run. For this reason, Research In Motion is among the stocks that deserve a better look especially for the three reasons highlighted above.

Disclosure: I am long SIRI, RIMM.