Unlike most articles written by Apple (AAPL) enthusiasts, bashing Research in Motion (RIMM) as an organization and a stock consideration, this author - believe it or not - is a long-time owner of Apple and as of fairly recently has also taken positions in Research In Motion.
Over the last few months, I have read a disproportionate number of articles on Seeking Alpha and other investment websites with either a recommendation to sell RIMM stock, or positioning it as a hopeless stock with little possibility of growth, by Apple fanatics and investors who were probably burned one too many times by Research and Motion, and no longer have the ability to be objective. This is giving a warped sense of reality. In fact, the negative press by bloggers is disproportionate to the actual outlook of the stock by analysts.
A look at the First Call Earnings Valuation Report dated Feb. 21/12 summarizes the recommendations of 46 analysts for RIMM stock. Of these, only four have RIMM at a "Sell" rating, with another eight rating them as 'Underperform.' In other words, only 26% of the analysts have an overall negative tone on the stock. The vast majority (31) have a "Hold" rating, with the remaining three having a "Buy" or "Strong buy" rating. However, the articles and blogs would lead you to believe that everyone is abandoning ship and the stock is a lost cause, despite the fact that 74% of the analysts have not yet come to that conclusion. Worse still, is that many of these articles are making statements that are baseless or untrue, and misrepresenting the facts. I will offer my modest opinion of a few of the biggest critiques and statements I've read over the last few months, in an effort to maintain some element of balance to the negative perceptions being presented about this stock.
1) Research in Motion should have fired their Co-CEOs many years ago
Really? I've read some bold comments from "geniuses" stating this should have been done as long as four years ago. Those types of comments triggered a rather scolding response from RIMM board member and dean of business at the University of Toronto Roger Martin. But in reality, he was right on the money. Let's look at Research In Motion's results for the last four years preceding the 2011 calendar year:
Data taken from Standard and Poor's RIMM stock report dated February 18, 2012
Revenue (Million $)
In what year exactly would you have fired the CEOs for being inadequate? Yes it's true that their fiscal 2012 (which ends Feb. 29, 2012) will have drastic reductions in both revenue and earnings per share, with the quarterly results showing an even grimmer story. And yes much of that is due to decisions made over the previous four years, but still who would have fired the CEOs with results like this prior to last year? Even most analysts were rating the stock as a buy till September of 2010 (First Call Earnings Valuation Report dated Feb. 21/12). Hindsight is great, but credibility is lost when bold statements are made after the fact - especially when many of these analysts were singing a different tune over the last four years.
2) Research in Motion has sat back and done nothing while Apple and Android tore their business apart
Another myth. Research in Motion has done plenty in an attempt to stem the slide in their market share over the years. RIMM did see the writing on the wall, and wasn't arrogant enough to think they didn't need to change a thing as is much reported. Here's a recap of some things Research in Motion did to defend against growing competition from Apple and Android.
- Launched the "Blackberry Torch" in 2010 in an attempt to meet the demand of touch-screen smart-phones while maintaining their keyboard "strength." They then moved to hybrid touch-screen and classic keyboard phones to also bring the best of both worlds in their Blackberry 7 lineup.
- They purchased QNX in 2010. QNX is powering the Playbook and will power the BB10 phones later in 2012. Research in Motion realized their strategy of improving their existing software and hardware wasn't working back in 2010, and that they needed to re-engineer their software from scratch. Acquiring QNX was significant and necessary to bring them back to competitiveness.
- Launched the Playbook early in 2011. Yes, this was a failed launch and probably came out too soon (it wasn't ready), but this was a significant investment for them and a major innovation. The Playbook was not well-received because of its short-comings, but many "techies" acknowledge the functionality and hardware it possesses is on par, and often more superior to many of the tablets on the market including the iPad (for one such review of many see here). The shortcomings have finally been remedied as of this month. Yes it wasn't a success, but we can't ignore the rush to market was entirely driven by RIM's realization that they needed to do something quick. And that was indeed a big mistake.
- Aggressively expanded into emerging markets where they didn't need to compete with Apple. This is the most overlooked but probably the most important and successful strategy Research in Motion did to survive the increased competition in the developed markets while they still had inferior phones. They got a foothold into some of the largest population centers in the world, when these nations did not and still have somewhat limited infrastructure to support the 'data hog' requirements of the iPhones. Doing this buys RIMM a lot of time, as it keeps them profitable and develops brand loyalty prior to Apple being able to penetrate these same markets, and gives them time to play catch-up with their new BB10 phones which have been endlessly delayed. If Research in Motion didn't do this and only focused on maintaining their market share in the already developed nations like many "geniuses" had suggested, they would probably be in the red and well on their way to bankruptcy.
RIM did take action and did not sit back, but their execution was flawed and their strategy wasn't enough to prevent the slide they underwent. I believe they've learned from their mistakes and the BB10 launch will be quite different.
3) No one with any sense is buying RIMM and no company would want to acquire them at their existing prices.
Another myth. If nobody was buying RIMM at $15 then the stock wouldn't be at $15, it would be much less. The reality is that there is a buyer for every seller, and it isn't just 'uninformed independents' like me who are buying them. Investment groups and other large shareholders are taking positions in RIMM, and why wouldn't they? Even the pessimistic outlook by analysts has them in the black for FY2013 and FY2014, earning approximately $5.87 a share over that time frame alone. Why wouldn't a company buy them today when they are trading at book value, and still get a return of $5.87 a share over the next two years added to their existing $1.3 billion plus in cash or $2.53 per share? Buying a company at less than $15 per share and getting over half of it back in two years, while keeping the valuable patents and their worldwide network of secure servers, sounds like a dream acquisition. A better question is why would the company want to sell at the current valuation? Blackberry's market share declines are already showing signs of softening, and this is without the BB10 launch. In a worst case, the company becomes a niche player making $1.5 Billion a year in profit for at least several more years. Even then the stock should level off to a P/E of around 8-10, which still gives investors a healthy return for a stable but not growing business. That would put the stock price close to double where it is today. I fully agree with the company's position that they want to fix their business before entertaining any sale. The company has more upside potential with a successful BB10 launch and global expansion than it has downside, since the downside is already factored in to the stock value and the patents and other assets have a natural floor that is much closer to today's price than the ceiling if BB10 is a success.
4) RIMM's new CEO Thorsten Heins thinks nothing is wrong and is staying the failed course.
This is the media playing with words. RIMM's present course is one of significant change. They are in the middle of significant global expansion and investing heavily in a new, game-changing software for them with BB10. Thorsten Heins was merely saying there was no need to give up while they are still in the black, and sell off their undervalued handset business when they are close to completing what may be their last effort to grow the business again with BB10. If this fails, they can sell it as a niche business, but it is already priced that way - so no need to do a panic sell today. Since many of the emerging markets are still using old technology Blackberry units, Research In Motion does indeed have the time to release the BB10 units later this year and have a positive impact on their stock in many markets around the world, with the exception perhaps of North America, where the timing delays will have a negative impact on the success of the new phones but not necessarily an irrecoverable one.
As I mentioned before, I am a long-time Apple investor and own both an iPhone and an iPad. I have no Blackberry products or ties, but will not ignore an investment opportunity when I see one. I saw no value in RIMM when analysts were pushing it as a buy the last few years and was happy to hang on to my Apple stock and watch it grow at the expense of RIMM and others. But now that RIMM stock has plummeted I believe it is a better investment than Apple going forward. RIMM will never regain its former market share and be anything close to Apple in the smart phone market, but its growth potential I believe outweighs that of Apple. Apple's stock price will be hard-pressed to double despite their many opportunities for growth in expanding markets and globally with tablets and new innovation. RIMM on the other hand has ample opportunity to do so. It is much easier to go from a 10% market share to 15% than it is to go from 50% to 75%. And RIMM too will benefit from the expansion of smart phones in the emerging markets as well, where they can hardly be seen as saturated for them today.
Disclosure: I am long AAPL, RIMM.