When Research in Motion (RIMM) released their 1Q-Fiscal 2013 results last Thursday, they had accumulated a cash pile of $2.25B per share, or roughly $4.29 per share. Although this is close to the largest net-cash position the company has ever had, many analysts are predicting that RIMM will burn through a majority of this position through the Blackberry 10 OS launch, destroying tangible book value. Barclay's lowered their price target to $6; however they assume a remaining cash balance of $3 to launch BB10. In addition, and to boost cash burn potential, a newly leaked roadmap highlights plans for an upgradable tablet release late this fall followed by a possible 128GB tablet next summer. Sentiment is extremely negative in the analyst community, with Yahoo Finance tracking only 2 'buy' recommendations out of 49 total analyst inputs.
As I stated in a previous article, dismal performance of BB10 and little to no cash retention is already priced into the price of RIMM stock. Barclay's is only projecting a net burn of $677M, yet still price-targeting RIMM at $6, which implies that they only see a $1.6B value to the patents, handset business, and BBM network. I think this number is pretty illogical, but perhaps Barclay's is not considering a break-up sale next summer immediately following a poor reception (flop) of BB10. If RIMM continues to struggle and doesn't throw in the towel following continuing poor sales, then theoretically they could settle at $6 or less. Theoretically, RIMM could trade for less than $1, even with over $4 of net cash. Sometimes the market prices stocks irrationally.
Cash Burn Projections
To get a better insight into RIMM's potential cash outlays between now and Spring 2013, I've analyzed the four previous 'key' quarters before the BB 7-Series and Playbook launch. The Playbook was released April 19, 2011 and the 7-series phones were released beginning in August 2011. So the best comparisons are 3Q-11 thru 2Q-12, which is roughly September 2010- August 2011. The prime difference this time around is that offsetting revenue (and operating cash flows) will be weaker. Speculation about upcoming reductions in carrier fees will also contribute to this reduction in revenues.
3Q-11: R&D- $357M + Sales-$666M
4Q-11: R&D- $383M + Sales-$705M
1Q-12: R&D- $423M + Sales-$704M
2Q-12: R&D- $381M + Sales-$683M
The average expense per quarter was $386M for R&D and $690M for sales. Assuming three full quarters with similar burns, RIMM will outlay approximately $3.23B between now and the end of March 2013. Sales will likely slow into the launch, so RIMM's primary life support will come from carrier fees. I expect average revenues of $2.5B with an average gross margin of 25%, this will provide $1.88B of offsetting cash flows. When the tax 'benefits' are added back in, I expect RIMM to lose approximately $1B of their cash over the next three quarters.
Tangible Value Following BB10 Flop Scenario
With $1.25B in cash remaining, or $2.38/sh, RIMM will also be sitting on warehouses full of Playbooks and new phones. It doesn't matter if they have to put on a fire-sale of these devices at 50% or less of retail, this is still a cash-accretive action. If you assume that the entire handset business including all inventories is worth $1B, coupled with a decreased network value of $1B, and a very conservative patent valuation of $2B, RIMM is still worth $10.
The only scenario that matches a $6 valuation is if the patents are only worth $1B and the cash is all gone. I believe that Microsoft (MSFT) or even Apple (AAPL) would gladly acquire RIMM for well over $3B, even after a BB10 flop. Why not let RIMM do all the financing and development and then take over the remains for pennies on the dollar.
This is not 'easy' money, there are always inherent risks, but I believe we are currently dwelling in the depths of the bargain basement.
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