Research In Motion (RIMM) would like to forget the past couple of years. From a price of around $60, RIM has seen its stock tumble to what is now only $8, losing more than 85% of shareholders’ value in the process. It all started with the Playbook debacle last year when RIM debuted a half-baked QNX platform without many of BlackBerry’s popular features, hoping wrongly that the nascent nature of the market would help it draw customers. Having learned a lesson from the poor Playbook sales, however, RIM decided to launch BB10 (which draws hugely from QNX) on its smartphones only when it was completely ready. This might have also been fine if the management had delivered on its road map, but the company delayed the launch at least twice, pushing back its release date by more than a year.
With BB10 delayed until the first quarter next year and competitors such as Apple (AAPL) and Samsung (OTC:SSNLF) expected to continue to munch on RIM’s market share until then, expectations from BB10 are at an all-time low. To add to RIM’s woes, competition in the smartphone market is only going to increase with Microsoft (MSFT) making a reinvigorated mobile play this holiday season with its combined Windows 8/Windows Phone 8 push.
All of this might justify the depressed valuations at which RIM is trading currently, but the company’s recent quarter reaffirmed our faith in the stock’s true value. With its back to the wall, RIM managed to post better-than-expected results as the company aggressively launched BB7 handsets and found new subscribers in emerging markets, taking the overall BB subscriber base to 80 million. Contrary to many expectations, RIM also managed to hold on to its cash balance as many of its cost-cutting initiatives in the CORE program took hold (see "RIM Manages To Conserve Cash As It Prepares For BB10 Launch Next Year"). The positive surprise helped move the stock up almost 15% since the earnings call last week, but we see far more value in the stock coming from its huge subscriber base and its unique value propositions in push email and security. Our price estimate of $12 for RIM’s stock is about 50% ahead of the current market price.
80 Million Subscriber Base Provides Value
The struggling smartphone maker has seen its BB unit sales fall year over year for the last five consecutive quarters. Last quarter saw RIM ship only 7.4 million BBs, a precipitous drop of 30% year over year and about 5% quarter over quarter. Device revenues for the first half of this fiscal year are already down over 50% over the same period last year. However, despite the revenue drop, RIM continues to add new subscribers every quarter, with many coming from international markets.
RIM currently has over 80 million subscribers globally. With BB nowhere near its peaks of customer appeal, RIM will be primarily looking to get this installed base to upgrade to BB10 initially. At the same time, RIM will bank on the push email and BBM service revenues from existing subscribers to tide over this difficult transition period. CEO Thorsten Heins has said the company is looking to leverage the security strength of BB services that governments and enterprises around the world have come to rely on.
We believe the BB services, which include push email and BBM, are unique value propositions for RIM’s customers, and the company is doing the right thing by realigning its focus on this segment. Our estimates show that this is RIM’s most valuable division currently, accounting for almost 45% of our price estimate for the stock.
BBM Still Relevant in Many Markets
But a carrier push to reduce fees as well as a loss of more enterprise customers to rival platforms, as the bring-your-own-device (BYOD) movement becomes more popular, could hinder RIM’s strategic moves to boost revenues from the services division. In addition, the new BB10 devices will not be supported by the existing enterprise servers (BES), potentially making the BES 10 upgrade process costlier and complicated thereby reducing RIM’s chances of pushing BB10 into the enterprise base.
However, the emerging markets of Asia-Pacific, South Africa, Venezuela and Indonesia, where the BB brand has not yet been hit as badly as in the developed markets, could be RIM’s dark horse. These regions continue to see a good number of new subscribers adopt BBs due to the continuing popularity of the BBM service in these markets. Much still depends on BB10′s reception in the market, and we do not really expect RIM to ever reach the heights it once commanded in the smartphone market. But if RIM does manage to make BB10 a strong smartphone OS, it could still remain relevant in the market and continue to generate cash from its enterprise and retail niche.
Disclosure: No positions.