Why Research In Motion May Be A Value Trap

Jul. 9.12 | About: BlackBerry Ltd. (BBRY)

Blackberry maker Research In Motion (RIMM) reported yet another weak quarter on June 28. The beleaguered phone maker's earnings fell short of consensus estimates of a $0.01 loss, with the company losing $0.37 per share for its fiscal year 2013 first quarter. The firm also saw revenue fall 43% to $2.8 billion, which was even shy of expectations. Perhaps most importantly, the firm announced its so-called "savior," Blackberry 10, will not be released in time for the holidays - though we question whether it will ever be released at all. The firm may have some intellectual property and network value, but it's difficult to determine if the operating company itself has any chance at survival.

RIM shipped 7.8 million Blackberry phones in its first quarter, down from 11.1 million units in its 2012 fourth quarter. The PlayBook tablet shipped 260,000 units, down from 500 thousand in the fourth quarter. We don't think RIM has much meaningful share in the tablet market, and we could see units steadily decreasing for the rest of the calendar year. iPhone (NASDAQ:AAPL) is quickly becoming the standard in the enterprise market. Thus, we think even Blackberry's entrenched user base may be migrating in the near future.

The firm retains a subscriber base of about 78 million, and it still owns popular mobile encryption software. RIM even managed to post $711 million in operating cash flow, though that's below the $1 billion the firm generated in the same quarter a year ago. Additionally, the firm has $2.24 billion in cash and equivalents on its balance sheet, so it may take a while for the company to burn through it.

We fully believe the firm should pursue strategic alternatives to its current situation. The company's inability to release its products on time and innovate marks a slow and steady decline, in our view. According to certain sources, Microsoft (NASDAQ:MSFT) CEO Steve Balmer had discussions about investing in the Canadian firm and even offered to allow the handset maker to run Windows mobile software. We think the fact that RIM refused to pursue an alliance with a cash-rich software company demonstrates how management is in firm denial of the true health of the business. We question whether CEO Thorsten Heins will actually put shareholders' best interests first.

Though we currently think shares are undervalued, we do not find RIM as an attractive investment at this point on the basis of the our buying Index, our stock-selection methodology. The firm may hold highly valuable patents, but evaluating the true worth of these patents varies with each potential strategic buyer. And how can we forget that Nortel had valuable patents, but the value was not recognized until equity holders were first wiped out. RIM scores a 3 on our buying index and may very well be a value trap if management continues to pursue a standalone strategy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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