Seeking Alpha
Profile| Send Message| ()  

It is alarming how fast Research In Motion's (RIMM) prospects have been fading. It’s been five years since RIM had dominant mind-share, and only one year since RIM had leading U.S. market share. Yet, these days we speak of RIM as if it’s already headed for the history books; and it’s hard not to. With deteriorating quarterly results, free-falling market share in the U.S., and poor traction in the tablet space, there is no shortage of bad news for RIM. Even the most bullish analysts are cutting their forecasts. However against all resistance, RIM’s stock price still manages to rally from time to time. Among the investors buoying RIM’s stock are the hopeful value investors and the rampant speculators.

There are two frequently stated arguments for RIM’s upside. One is a dramatic turnaround with strong BlackBerry 7 sales followed by a QNX-fuelled rebirth. The second involves RIM being strategically acquired at a premium to its current stock price. Both hinge on the notion that RIM trades at below its intrinsic value. I’ll take this one step further and say that an intrinsic value of $30 is not too far of a stretch – not far beyond average 12-month price targets (which at last glance was $28.74; mind you, some analysts are targeting over $40).

Admittedly, given the current sentiment surrounding RIM, $30 already sounds like an idealist’s point of view, but what really does $30 say about RIM’s prospects? What level of success does RIM need to achieve to justify such a valuation? Because without a good interpretation, who’s to really say that $30 is realistic or just absurdly optimistic.

The purpose of this article will be to examine a $30 valuation for RIM as objectively and transparently as possible. I will be focusing on the revenue side of the equation – estimating the size of the smart phone market over 10 years to gain a sense of what RIM’s revenue stream could look like. From there I will be looking at RIM’s theoretical intrinsic value in relation to its long-term net margin percentage.

Disclaimer: This article is written in three parts. While the actual valuation is reserved for a future write-up, this article examines the global and U.S. smart phone markets with respect to RIM’s BlackBerry.

BlackBerry metrics on the world scale

The first step is to establish what the current situation looks like – how big is the smart phone market, and how big of a share does RIM command?

For this I emphasize beginning with a global perspective for distinct data-related advantages. Not only do we want to be in sync with RIM’s non-financial disclosures which are limited to total subscribers and shipments, but we also want to take advantage of global mobile phone estimates publicly reported by reputable research firms, Gartner and IDC.

World (in millions)

Feb-09

Feb-10

Feb-11

Feb-12

Source

Population

6816

6896

6972

7049

United Nations

Mobile phone penetration

58.9%

67.5%

75.8%

Calculated

Mobile phone subscribers

4012

4652

5282

International Telecom. Union

smart phone penetration

5.0%

6.0%

8.5%

Calculated

smart phone subscribers

200*

280*

450*

Mike Abramsky, RBC

BlackBerry market share

12.5%

14.6%

13.3%

Calculated

BlackBerry subscribers

25.0

41.0

60.0*

80.0*

2010 Annual Report

Average lifespan of mobile phone

3.4

4.0

3.8

Calculated

Mobile phones sold

1190

1172

1388

IDC

smart phone penetration

11.7%

14.7%

21.4%

Calculated

smart phones sold

139

172

297

Gartner

BlackBerry market share

18.7%

21.3%

17.6%

Calculated

BlackBerrys sold

26.0

36.7

52.3

52.9

2011 Annual Report

New subscribers per unit sold

0.42

0.44

0.36

0.38

Calculated

* Estimated based on imperfect or partial data

Here’s what I see:

  • The market for mobile phones is enormous – there are hundreds of millions of net new mobile phone subscribers each year. Mobile phone penetration has increased from 59% to 76% between February 2009 and 2011. This 16% increase over 2 years has yielded almost 1.3 billion new subscribers.
  • The size of the smart phone market can realistically double within the next few years, which means that there are huge growth opportunities even without market share expansion. smart phone penetration is still low at 8.5% of mobile subscribers and 21.4% of annual mobile phone sales. Both smart phone subscriber and sales numbers have exhibited 50% average annual growth between February 2009 and 2011.
  • smart phone penetration of sales significantly exceeds that of subscribers (21.4% versus 8.5% in 2011). This suggests that smart phone subscribers replace their phones more frequently than other subscribers, and as a consequence, mobile phone sales will accelerate as smart phone penetration rises.
  • The pace at which the smart phone market is growing has allowed BlackBerry to substantially increase its subscriber base and sales volume in FY 2011, despite slipping a few percentage points in market share. Between February 2010 and 2011, BlackBerry subscribers and sales grew over 40%, while market share declined by 1.3% in terms of subscribers and by 3.7% in terms of sales.
  • For every 2.75 BlackBerrys sold, RIM gains one net new subscriber. This metric is worsening, which suggests that RIM is either increasingly selling to the same customers, or that they are finding it more difficult to replace lost subscribers. The inverse of this relationship is “new subscribers per unit sold”. In FY 2011, there were only 0.36 new subscribers for every unit sold. Five years ago, back in FY 2006, this figure was 0.59 – that’s 1.7 BlackBerrys sold for one net new subscriber.

BlackBerry in the U.S.

Let’s shift gears for a moment and focus on how the BlackBerry is faring in the U.S., which until recently has been RIM’s most important market. It is well-publicized how much traction RIM has lost with Americans, but it is lesser known how RIM’s overall sales numbers are affected by the speed at which the smart phone market is growing. Exposing the net effect is just one benefit of this segmented analysis.

U.S. (in millions)

Feb-09

Feb-10

Feb-11

Feb-12

Source

Population

308

310

313

316

United Nations

Mobile phone penetration

87.9%

92.0%

96.8%

98.0%

Calculated

Mobile phone subscribers

270

286

303

309

CTIA

smart phone penetration

11.1%*

19.4%

31.0%

40.0%

comScore

smart phone subscribers

30.0

55.5

93.8

123.8

Calculated

BlackBerry market share

38.5%*

42.1%

27.1%

15.0%

comScore

BlackBerry subscribers

11.6

23.4

25.4

18.6

Calculated

Average lifespan of mobile phone

1.2

1.2

1.3

1.2

Calculated

Mobile phones sold

224*

235*

230*

258

FCC, SNL Kagan

smart phone penetration

17.4%

19.2%

29.1%

40.0%

Calculated

smart phones sold

39.0

45.0*

67.0

103.1

Gartner

BlackBerry market share

42.0%

47.1%

30.7%

15.0%

Gartner

BlackBerrys sold

16.4*

21.2*

20.6*

15.5

2011 Annual Report

New subscribers per unit sold

0.56

0.10

-0.44

Calculated

* Estimated based on imperfect or partial data

Here are some of the highlights:

  • Between February 2010 and 2011 BlackBerry’s share of smart phone subscribers fell from 42% to 27%. Meanwhile global market share retracted only slightly from 15% to 13%. Two things are evident: RIM has had to shift towards alternate markets to maintain its growth targets, and U.S. performance is no longer representative of overall performance.
  • The market for mobile phones is nearing saturation, but the opportunity for smart phone substitution is substantial. In February 2011, mobile phone penetration was 97%, with just under 6% growth in mobile phone subscribers from a year earlier. In contrast, smart phone penetration, sitting at just 31%, was accompanied by nearly 70% growth in smart phone subscribers during the same time period.
  • Mobile subscribers are replacing their phones nearly once a year, which is approximately three times as frequent as the world average. This suggests that increasing smart phone penetration is unlikely to boost mobile phone sales volumes in the U.S., which is in contrast to the world trend I noted earlier.
  • RIM’s market share peaked in 2010 at around 42% of smart phone subscribers and 47% of smart phone sales. By the end of the current fiscal year, it is possible that RIM’s market share will be only 15% by both measures. For reference, comScore (a digital marketing intelligence company) last reported RIM’s market share at 19.7% for the three-months ending in August 2011.

Forecasting U.S. market share

With a sound understanding of the trends that drive the U.S. market, we proceed with a 10-year forecast – an exercise I will subsequently repeat for each of RIM’s major geographies. The idea is that forecasting individual markets is more meaningful than only forecasting the sum of the parts. There are fewer variables in play and intuition is stronger when data is segmented into well-understood groups. Furthermore, most tangible evidence is presented in segmented form – news such as how well Blackberry 7 sold in New York, or trends such as what phones teenagers carry in Boston these days.

Below I have forecasted U.S. smart phone metrics and BlackBerry market share over the next 10 years. My key assumptions include:

  • RIM is a going concern; or any acquirer models RIM's cash flows as a going concern.
  • smart phone penetration in 2021 will be 95%.
  • BlackBerry’s long-term U.S. market share will be 12%.

10-year U.S. forecast
(Click to enlarge)

Immediately, what stands out is the growth in subscribers and sales available to RIM simply by maintaining 12% market share. It is unlikely that RIM will ever return to dominant form, but growth is certainly still in the equation.

The argument becomes even more compelling when the forecast is visualized with a line chart. Below, the orange line depicts my forecast for BlackBerry subscribers. The dotted lines represent subscribers for other platforms – purely hypothetical beyond 2011, but constrained to accurately portray my forecast for total smart phone subscribers.

Imagine this: Google’s (GOOG) Android platform dominates the U.S. scene for the next 10 years, followed by Apple’s (AAPL) iOS as the second most popular. Towards 2021, a resurgent Microsoft platform finally overtakes iOS just as a new generation of entrants begins to shake up the market. All the while, RIM’s BlackBerry floats along as a distant fourth player.

This is the story depicted in the chart below. This is what a 12% market share for RIM looks like – by no means an aggressive scenario. If RIM can achieve at least this level of success over the next 10 years, then it is worth at least $30.

U.S. smartphone subscribers by platform
(Click to enlarge)

I will continue this discussion in a following article, where I will similarly look at the Canadian, U.K., and “Other” markets. Subsequently, I will utilize the overall revenue forecast in a DCF calculation to demonstrate how this leads to a $30 intrinsic value estimate for RIM. The objective, if I may remind you, is not necessarily to establish a buy/sell recommendation but rather to substantiate the conditions under which RIM is worth at least $30.

Disclosures regarding the data

  • February 2009 to 2011 are based on historical figures, while February 2012 is forward-looking – based on management’s guidance and my own expectations for 2012 Q3 and Q4.
  • Annual increments ending in February are used for alignment with RIM’s fiscal year. As a side-effect of this convention, I am forced to time-shift figures for which only year-end data is available. In general, I will use, without interpolation, 2008-year-end-figures for February 2009, 2009-year-end for February 2010, and 2010-year-end for February 2011.
  • My tables are partitioned in two halves – subscriber metrics (top) and sales metrics (bottom). Each section is similarly structured; each with an independent representation of smart phone penetration and BlackBerry market share. In the middle, the statistic “Average lifespan of a mobile phone” is used to tie the two sections together. (Specifically, it is the ratio of “Mobile phone subscribers” to “Mobile phones sold” and can be roughly interpreted as the number of years between a subscriber’s mobile phone purchases.)
  • Population estimates are based on the 2010 Revision of the World Population Prospects published by the United Nations. I used their medium fertility estimates and linearly interpolated between their five-year projection intervals.
  • Mobile phone penetration can exceed 100%. This occurs when there are on average multiple mobile subscriptions per person.
  • Data for sales (to end-users) and shipments (to vendors) are used interchangeably. (As I understand, Gartner’s figures are based on sales while IDC’s numbers are based on shipments.) Typically, this distinction is unimportant, but in certain cases, for example when channel inventory builds up, sales and shipments can deviate.
  • The BlackBerrys sold figure for geographically segmented data is roughly approximated. It is assumed that RIM’s overall revenue breakdown by geography can be used to approximate the share of units sold per geography. This is obviously an imperfect assumption due to varying average selling prices around the world, but the simplicity in logic is what I’m aiming for.
  • My segmented data is in general subject to greater error than my World data. A shortage of estimates from consistent data sources is the primary culprit.
  • My subscriber totals intentionally do not match those estimated by comScore. Since comScore surveys only the portion of the population age 13 and over, their absolute figures cannot be used directly. Instead, I have used comScore’s percentage figures and assumed they hold true across the entire population.
Source: Research In Motion: What's In A $30 Price Target?