I have been bearish on Research In Motion (RIMM) for several months now. My article, "Research In Motion: Signs Of The Up-Coming sell-off", detailed several issues and concerns with Research In Motion's business. The stock has since dropped 50% from the time my article was published. Management has continuously failed to respond quickly to what consumers wanted.
The wireless industry is fast paced and it is not unusual to see one manufacturer have the hottest device one quarter and another manufacturer have the hottest device the next quarter. It's important for manufacturers to adapt to consumer trends by staying ahead of the curve and continuously reinventing itself. Research In Motion has once again failed here. The company recently announced that its line of QNX devices which was expected to launch early next year will now launch in the later half of next year. This could possibly put the company head to head with the next Apple (AAPL) iPhone launch.
Many investors have cited Research In Motion as a buying opportunity due to its valuation and potential to be a buyout target. Even though there aren't many strategic buyers left that would want to acquire Research In Motion, Google (GOOG) is working on completing its Motorola (MMI) acquisition and Microsoft (MSFT) already has a close relationship with Nokia (NOK). Private equity funds may take a look at Research In Motion due to its intellectual property portfolio alone. Intellectual property has become a hot asset as manufacturers sue each other to block sales of devices or to use as leverage when negotiating licensing terms.
Research In Motion is trading real close to its liquidation value and will start being of interest to funds that will want to acquire the business. I estimate the value of its intellectual property to be around $4 to $5 billion. This is around the price that the Nortel patents recently sold for. Research In Motion currently has 2,500 patents and there is currently no company that has valued each patent individually. Research In Motion also has a service and software side to its business. In the most recent quarter, Research In Motion generated $970 million in service revenue and $80 million in software revenue. So even without factoring the hardware business, Research In Motion would be worth close to its current market cap.
I will look to slowly cover the rest of my Research In Motion short position as the company drifts lower. I don't believe Research In Motion set the bottom yet but is close. I wouldn't be surprised to see RIM test the next major support which is around $8. Research In Motion hasn't seen that price since the fourth quarter of 2003.
Even though the company may be trading close to liquidation value investors are still concerned that the business may continue to deteriorate as Research In Motion struggles to compete. The company recently took a $485 million charge on its Playbook inventory. Research In Motion also restated its forecasts and now expects to sell 11 to 12 million devices in the fourth quarter, this is compared to analysts expectations of 13 million. Markets tend to overreact, which creates a disparity in valuation. I believe that is what is happening with RIM.
I'm now bullish on RIM long term and will look to flip my position to a long. The QNX line of devices should help RIM compete once again. I also see a big future for RIM's software business. I believe that the company's new Blackberry Fusion program will open up new revenue streams, as the company looks to integrate its platform with other operating systems.