I'm in the market for a new cellphone and these so-called smart phones don't come cheap.
However, they certainly do a lot more than that "brick" we used to lug around not so many years ago. Technology is an awesome thing! Sometimes, these innovative companies end up as victims of technological advances, trends or complacency. I view Research In Motion Limited (RIMM) as one such victim. I remember when the Blackberry was the crème de la crème of mobile phones. In those heady days, the Blackberry was the de facto equivalent of the executive washroom key. Now, Research in Motion's economic moat has been backfilled by the likes of Apple (AAPL), Google (GOOG), Nokia (NOK) and Samsung (SSNLF) to name a few.
We are all aware of Research In Motion's recent past and it begs the question - does it have a future? Before answering that, I want to review its fundamentals. Research In Motion has a market capitalization of around $5 billion and trades at about $9 per share, less than one-third of its 52 week high. The trailing twelve month price to earnings ratio stands at 4.04 with a price to earnings growth ratio of -68.38. Price to book is 0.46 and return on equity is 12.23%. As one might expect, quarterly year-over-year revenue and earnings growth are - 24.6% and "N/A," respectively. A look at the income statement reveals that net income is down some 65% from the prior year. Research In Motion logs an "N/A" in the debt to equity column and 2.08 as a current ratio. Investors do not receive a dividend.
Now let's examine the problems and try to determine if they can be corrected and Research In Motion returned to a competitive position in the market. I view these 3 things as the most significant problems - management, competition and infrastructure.
Management has already undergone some shifts. In January of this year, Research In Motion named Thorsten Heins, former COO, as its new CEO. Six months in, share prices continue to fall and the fundamentals continue to weaken, casting doubts on how positive an agent of change Heins has been or will prove to be.
Competition in the smart phone and tablet market is nothing short of intense. Research In Motion's unique selling points, corporate security and free messaging via BlackBerry Messenger have been commoditized. Only its keyboard sets it apart from the competition and the Blackberry 10 doesn't have one. Research In Motion has already scratched the 16 gigabyte version of its PlayBook tablet, continuing the 32G and 64G versions. It sold one-half million PlayBooks in the first quarter compared to Apple's 11.8 million iPad sales. Samsung sold 1.6 million Galaxy tablets in the same period. Apple countered with a patent infringement suit and was granted a U.S. District Court injunction forcing Samsung to halt Galaxy tablet sales in the United States. Google and Microsoft (MSFT) also have ambitions in the tablet market. Apple is way, way out front and in my opinion, the PlayBook gambit was poorly timed. Playbook was rolled out sans BlackBerry Messaging and email capability.
Infrastructure is my third concern with Research In Motion. Reports of almost daily layoffs give me pause. While there is typically dead weight in every corporation, such a high percentage (over 10%) of the 16,500 employees being dismissed, suggests management is sacrificing human capital to shore up the bottom line. Research In Motion has already experienced a serious infrastructure failure that suggests deep cuts in staff could put the company at even greater risk of additional failures in the future. Another failure of that magnitude would be difficult to survive.
Warren Buffett has said, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." He knows that emotions like hope, greed, and fear dictate stock prices rather than logic and value. When people are panicky or fearful he takes the opportunity to buy great companies at cheap prices. I feel that Research In Motion at its core is a great company. The company is undervalued, from a discounted cash flow standpoint, by 88%.
At least one firm has upgraded the stock to market perform. Even Zacks acknowledged that it is unlikely that share prices will continue their slide and issued a neutral rating on the stock. Research In Motion has publicly acknowledged a merger and acquisition option is on the table as part of its strategy. Research In Motion could soar in value if it could achieve some synergies with another firm. Its cash position is still very strong as anyone can see from its balance sheet. The company has a huge customer base and despite occasional problems, those numbers have not dipped.
The customer base is global and that, in addition to its favorable cash position, can make Research In Motion a very attractive partner. For the moment, Research In Motion has staked its future on the BlackBerry 10 smart phone, due out either in late summer or early fall. Until those devices come out, and perhaps for a while after as well, expect to hear more bad news as management rallies a shrinking workforce and attempts to orchestrate the turnaround. It is my opinion that Research In Motion is unlikely to fall further and has a better than average upside potential.