Mysterious Research In Motion

May.14.12 | About: BlackBerry Ltd. (BBRY)

I will briefly discuss the current valuation and the future of Research In Motion (RIMM). I will be rounding up the numbers.

I have previously said that RIMM faces major challenges and made several blunders. I have also said that RIMM moves too slowly.

Friday, May 11, 2012 RIMM closed at $11.80. RIMM has 524 million shares outstanding giving RIMM a market capitalization of $6 billion. RIMM has $2 billion in cash, short-term and long-term investments and no debt implying an enterprise value of $4 billion. The tangible book value is about $13 and the book value is about $20.

RIMM has spent a few billion dollars buying companies creating goodwill and also bought patents. The last major patent purchase was from Nortel where RIMM spent about $800 million. Of course RIMM has thousands of patents developed in-house. These patents and intangibles are valuable. Google (NASDAQ:GOOG) paid Motorola Mobility (NYSE:MMI) $12.5 billion mainly for MMI's patents (less cash). Microsoft (NASDAQ:MSFT) recently paid $1 billion to AOL (NYSE:AOL) for its patents. Patents are hot. We all know companies like Apple (NASDAQ:AAPL), Samsung and HTC are suing each other all over the globe over patents. From just a balance sheet perspective, RIMM trades at a substantial discount to its book value and even below its tangible book value.

Oh, I almost forgot. RIMM generated $600 million in cash ($1.15 per share) just last quarter. Even the most pessimistic scenario shows RIMM making a profit for the next few years thereby increasing its book value even further. RIMM will be generating free cash flow as well since RIMM has done most of the buying to develop BB10 and has categorically stated that it will look to partnering to beef up other offerings like media consumption.

Is RIMM losing market share? The answer is an emphatic yes (and very pathetic as well). Are there major risks with a major technology overhaul as RIMM makes a platform transition to BB10? Nothing could be more obvious than that. There are major challenges and risks with such a move. Did RIMM make major blunders last few years and dropped the ball? That is very true. After all, Mike Lazaridis and James Balsillie created an empire and then lost it. If that were not the case, it would have been RIMM, not Apple, counting those hundred billion dollars. Punishment should have some relationship to the crime committed. In the case of RIMM, the company has been so beaten down that at this valuation; it has no relationship to the value of the underlying assets and their cash generating power.

Enterprise value of $4 billion or about $8 a share for RIMM is extremely undervalued to the point of being mysterious. RIMM's service revenues were more than $4 billion last year and they have been increasing every year. These service revenues have 85% gross margins. Despite that, there is no reason to value this business segment, along with all other assets besides cash, at less than $4 billion. Essentially RIMM's business is given a valuation of less than one time its 85% gross margin service business revenues. I understand that these margins will drop a little as carriers reduce the payments to RIMM for using its unique, secure network plus if the volume of new hardware business deteriorates then the top line of service revenues may start suffering. That has not happened and unlikely to happen as RIMM introduces more and more devices targeting huge markets around the world. An interesting and thoughtful article was written in Seeking Alpha on this issue. In fact the top line has grown consistently. With the addition of new services, like Mobile Fusion, available on all platforms, RIMM may see the top line expanding faster than before. Remember, RIMM's secure network is unique and extensively inter-connected and can be exploited to provide a number of services. I wrote an article on that and almost done with further thoughts on it. I should have it ready soon.

RIMM has relationships with all the carriers, is present in almost all the countries and is a leading brand in a number of countries. RIMM is well entrenched in enterprise with 90% of the S&P 500 companies using RIMM's products. RIMM's government business is strong as it relies on security provided by Blackberry. There are currently 77 million paying subscribers. Every Blackberry comes with a unique pin. So basically what RIMM has is a social network in a box. Someone will monetize this very effectively.

Of course, RIMM is facing very strong headwinds from Apple and Android devices and soon from Windows devices. RIMM's device business got slammed in the U.S. market as well as many European countries. It narrowly lost its first place to Apple in Canada, its home country. More and more enterprises are adopting "Bring Your Own Devices" model and more employees are choosing non-Blackberry devices. RIMM missed the memo on how important it is to have an app ecosystem and as a result Blackberry App World is far behind Apple and Android. RIMM missed the boat on shifting consumer preferences. There are several other blunders that RIMM made and I have no doubt that those who are negative on RIMM will point those out, and then some, in the comments' section below.

Coming back to the valuation and related metrics; I will ask my readers this question. Given all the challenges that RIMM faces, is the inherent value of the business (patents, network, customers, technology, security, PP&E; cash generating capacity, potential to unleash value) less than $4 billion? Now those who are negative on RIMM will say that as RIMM loses more market share; all these assets will go down in value. To a certain extent, they may be right but RIMM is expected to be profitable for the next few years and has a clean balance sheet. The current valuation of RIMM assumes everything that can go wrong will definitely go extremely wrong and RIMM will definitely keep faltering and screwing up time and again and its network destroyed mysteriously and ultimately sold for crumbs ($10-14) a share. Is that possible? Yes; but then it is also possible that tomorrow I am crowned the queen of Denmark. But it won't happen.

I almost forgot to mention that RIMM has been working on a new platform for mobile computing, BB10, that is supposed to leap-frog the competition at best but with average expectations it should make RIMM competitive on those performance issues where it was left behind. QNX, the operating system powering BB10, is used in a wide spectrum of industries including automobiles and nuclear plants. Imagine an operator controlling nuclear reactors with a BB10 device. How cool will that be? Kidding apart, BB10 has some super capabilities like predictive typing, true multi-tasking and it is an easy platform to develop apps for. BB10 could very well be a very dominant mobile computing platform that could be a game-changer and extremely profitable in the trillion dollar industry. Let us assume BB10 is worthless and a total failure.

So what is the value of the different pieces of RIMM?

Network/Services business: $10-24 billion

Patents: $2-8 billion

Subscribers, enterprise customers, public sector business: $1-2 billion

Cash: $2 billion

Total: $15-36 billion or $28-70 per share. If we take the mid-point, we get a valuation of $49 per share. Obviously, these are estimates but the underlying investment thesis is that this company owns assets that can be easily monetized today for around $50. A further one third haircut gives a valuation of $33 a share while the stock trades at $12. This after making assumptions that BB10 has no value. This $12 is a complete mystery to me.

Now if BB10 is successful, what do you think the numbers will look like? What are the possible valuations possible? I would love to hear thoughts from readers.

Disclosure: I am long RIMM.