Over the past year and a half, shares of Research in Motion (RIMM) have plummeted by more than 90%. It may be hard to believe now, with the stock mired below $7, but the company traded over $70 just last year. The company's fall from grace has been well-deserved, as the old BlackBerry OS feels hopelessly outdated, compared with Apple's (AAPL) iOS, Google's (GOOG) Android, or even Microsoft's (MSFT) Windows Phone 7. It is extremely unlikely that the company will ever regain its former position at the cutting edge of the smartphone world. At this point, the more relevant question for investors is whether RIM still stands a chance of keeping a niche position in the smartphone market.
The key hang-up there is the ongoing delays to RIM's new BB10 OS. The first phone running the new operating system was once expected for Q1 2012. Over the past year, the operating system's name has been changed twice (from QNX to BBX, and then to BB10), and delayed twice as well. Last December, on the company's Q3 earnings call, management announced that the QNX phones would be delayed until late 2012. While the software was supposedly on schedule, co-CEO Jim Balsillie stated that RIM had selected an integrated chipset for the new devices that would not be available until mid-2012. However, it later transpired that the software was also not up-to-par, and so a second major delay was announced two months ago in the Q1 earnings release.
RIM's struggles can in part be traced to the difficulties of catching up in the fast moving smartphone race. Nokia (NOK) is another company learning the same lesson. Nokia's management eventually realized that the Symbian OS was losing popularity, and abandoned it in favor of Microsoft's Windows Phone software (without notable success thus far). RIM is determined to keep its own proprietary OS, but its development team has had difficulty designing a product that innovates beyond what other phones can do. With a smaller (though still significant) installed user base and small app ecosystem, RIM is fighting with one arm tied behind its back. Many customers, particularly in the U.S., are abandoning BlackBerry simply because the people they know have switched phones, or because they think the company is on the verge of bankruptcy.
As a result of these customer defections, RIM posted a loss in Q1, and the company is expected to post losses through the rest of the year as the product portfolio continues to age. New CEO Thorsten Heins has put on a brave face in light of RIM's struggles. He claims that the most recent delay was due to the need to properly integrate the core features of the new OS. Whatever the reason for this delay, it's hard to give Heins a free pass (even though the target had been set by the previous CEOs) because he was one of the company's COOs prior to holding his current position. On the other hand, Balsillie and Lazaridis really dominated the company during their tenure at the helm, and so they deserve most of the blame for RIM's current predicament.
Ultimately, it was inevitable that Heins' optimism would be met with mass skepticism on Wall Street. RIM needs to put out the new device lineup and show tangible improvement in operating results for the stock to gain some traction. There's no doubt that the new OS is better than BB7 and previous versions by leaps and bounds. It will offer a much more competitive internet browsing experience. I am also intrigued by some of the features being added, such as a new contact management system that syncs social media updates to the contact page.
I feel pretty confident that the BB10 release, if it comes on time, will be able to keep current BlackBerry users within the fold. However, many of the most profitable customers have already defected. The million dollar question is whether the new BlackBerry lineup can provide enough features to win new customers. A large factor here will be the size of the app marketplace. RIM has made it relatively easy for developers to port Android apps to the new OS. The real question is how many developers will actually take the time to do that. Even though the app marketplace is bound to be smaller than Apple's or Android's at launch, if it has most of the "big-name" apps, I think that will be enough to win business from customers who want the BlackBerry's security features or QWERTY keyboard. Given RIM's seriously depressed valuation today, it wouldn't need a very big comeback in terms of market share in order to revive the share price. While Heins has been adamant that RIM's goal is to "win", any sane investor would be happy to settle for a strong third place showing in the long term.
RIM analyst estimates for next year are all over the place. According to the data at Yahoo! Finance, analysts are predicting revenue anywhere between $5.63 billion and $14.36 billion next year. This compares with over $18 billion last year and perhaps $10 billion this year. Thus, some analysts expect a modest recovery in the first year of the new OS, while others expect the downward revenue trajectory to continue unabated.
I think that (assuming the OS does release in January) RIM can beat the midpoint of that revenue range. Revenue was over $5 billion in the first full quarter of BB7. Given that BB10 is a much bigger upgrade than BB7, I think that a $3-$4 billion quarterly run rate should be achievable, after accounting for recent customer defections. With recent customer losses in developed markets, the BlackBerry diehards make up an increasing percentage of RIM's user base (over 75 million customers today). It's reasonable to assume that every diehard BlackBerry fan will upgrade to the new device/OS at some point next year.
By no means do I think anyone should bet their life savings on RIM. However, below $7 the company is a very interesting speculative buy. Since RIM has a book value of $13, even if the new devices fail, investors should be able to extract some value from the company. If it can solidify a market share in the high single digits or better, the stock has lots of upside. BB10's success is not a sure thing, but I think it stands a better chance of returning RIM to profitability than the market currently thinks.
Disclosure: I am long RIMM.