I’m really tempted to start this post off with a rim job joke. (Aside: Is rim job one word? Or two?) I mean, that’s pretty much the low hanging fruit here, isn’t it? I’m going to refrain, because I like to pretend I’m a classy guy.
Back in the final week of March, I took a little nibble on one of my stock picking contest entries, Research In Motion. The Waterloo based company revolutionized cellular technology back in the late 1990s, becoming the first company to make a cell phone that allowed users to also get their emails on the go as well. It all sounds so quaint, doesn’t it?
RIM rolled along for years, until Apple and everyone’s favorite
jerk genius Steve Jobs decided Apple was going to come out with an iPhone. Sales exploded, and even your humble blogger bought one. And then upgraded to another one. I know, that’s not a very good personal finance decision. I was seduced by the sexy apps, dammit.
At its zenith, RIM shares traded hands for almost $120 on the TSX. Revenue was growing, business people couldn’t get enough of the secure email system, and the company began an aggressive expansion overseas. The stock currently trades for about a tenth of its 2008 highs. Everywhere you turn, people are clamoring for RIM’s bankruptcy. Why would I buy shares then? Am I some sort of drunk moron?
Nah. In fact, I think I’m making a smart contrarian buy. Here’s why.
The Balance Sheet
RIM’s balance sheet is a more beautiful work of art than that time that elephant made all those paintings. There isn’t a nickel of debt. The company is sitting on $1.75B worth of cash. Inventory levels are creeping up a little, which isn’t the best thing for a tech company. The company is sitting on $3.2B worth of intangible assets, most of which are the approximately 2000 patents they own. Valuing those patents is pretty much a crapshoot, but we do know that Microsoft agreed to pay AOL (remember them?) over $1B for most of their patent portfolio. Kodak’s patents are expected to net the now bankrupt company close to a billion dollars. We can only guess what RIM’s patents are worth, but there’s definitely value there.
The company has a book value of $19.27 per share. It’s trading for about 67% of book value, based on yesterday’s closing price. It’s not very often you can buy a tech company without any debt for less than book.
Naysayers will point to the alarming income trend. It’s true, the company has seen it’s healthy margins evaporate into a quarterly loss in just over a year. Although, the company would have eked out a small profit if it wasn’t for a goodwill write off. The company needs to cut expenses, and only time will tell if they can do so. The good news is, although the short term looks bleak, the company still has plenty of room to take on debt if needed. They’re a long way from bankruptcy.
New Operating System
RIM plans on releasing the new Blackberry 10 operating system later on this year. Early reviews like the software, it’ll be very similar to the one used on their Playbook tablet. I’m not enough of a tech expert to know whether it’ll be any good or not.
What I do know is the big American wireless companies are excited to push phones that aren’t Apple or Android. Nokia’s first smartphone running Microsoft’s operating system comes out this month, and already AT&T has signed up to be the exclusive American carrier. Nokia is pricing the phone to sell (starting at $99) and all it needs to do is be a moderate success for the market to be pleasantly surprised.
The same thing will happen to RIM’s new phones when they come out later this year. If they can even create a little bit of excitement, the stock should rebound.
Tech Is Cyclical
In 1997, Microsoft made a $150M investment into struggling Apple. The cash infusion saved the company from bankruptcy. Apple slowly rebuilt market share, first in iMacs and then in the consumer electronics we all love today.
In 2004, Nokia dipped to almost $10 per share. They were losing market share quickly to their lack of flip phones. (remember those? I’m so old) Nokia righted the ship, and the stock rose to $40 in 2007. I bought at around $12, but sold much too quickly, exiting my position at $19.
Just last year, Cisco dropped below $14 per share, based on 4 consecutive earnings misses. There was concern about just about every aspect of their business. Today, the stock trades at around $20.
The point of all these stories is simple. Tech is cyclical. Former high fliers get beaten down, usually because some new sexy product has entered the hearts of consumers. The company suffers, and the stock sells off. Once the company hits bottom, they reinvent themselves and slowly start to regain market share, eating into the previous cycle’s champion. I’m counting on this to happen with both RIM and Nokia.
Co-CEOs Jim Balsille and Mike Lazardis firmly responded to rumors back in November that the company wasn’t for sale, effectively squashing Amazon’s reported interest in the company. Luckily for shareholders, the co-CEOs stepped down in January, removing at least one obstacle in a takeout.
Everyone from Cisco to Microsoft to the aforementioned Amazon has been rumored to have some interest in RIM. Considering the depressed level of the shares, a buyout could happen. I’m not holding my breath though.
Technology is an interesting area to be a value investor. A balance sheet can look great, but it doesn’t matter if you can’t sell any widgets. All you can bank on is the company being able to turn things around. If RIM can, then I don’t think my $55 target price is out of reach. I’m happy to invest in companies like this all day long.
Disclosure: Just in case you didn’t read the post, I’m long shares in RIM and NOK.