Research In Motion

Everyone knows RIM stock has been beat up lately. Completely FUBAR. It's to the point where I'm regularly fielding emails from folks asking me about it. And in Skyping with Kevin recently, he's seeing the exact same thing. So this post is all about the stock.

The first thing I want to make absolutely sure people (mostly newbies) understand is that RIM isn't "cheap" just because it trades at $10ish while Apple trades at over $500. People who don't understand stocks fall into this trap, so I'd like to prevent that from happening to CrackBerry readers.

Simply put, a stock is a piece of a company. Just like a slice of pizza is a piece of the whole pie. When you look at stocks, you have to consider how many stocks make up the whole company. The stock price alone is NEVER something you should look at, when comparing one stock against another. Never.

Now that we've got that out of the way let's talk about RIM. Thursday the stock dropped yet again to $10.71 on the NASDAQ. Again, the price means nothing on its own. So let's look at some useful metrics instead.

Market capitalization: There are 515 million shares of RIM outsanding. With each share just under eleven bucks that makes the whole company worth $5.52 billion. For perspective, Apple is worth 529 billion, almost 100x more than RIM. Nokia worth 10.17 billion or almost double RIM's value.

Don't read too much into these comparisons yet because market cap is still not even close to a full picture. I probably won't be able to give you a full picture in this article, but I'll do my best.

Price to Sales (P/S): If we take market capitalization and divide by annual sales, we get a price to sales ratio. This is more useful because it tell us how the market values each dollar of sales in a company. RIM trades at 0.3x while Apple is at 3.75x. So the market sees one dollar of Apple revenue worth well over 10x the value of one dollar of RIM's sales. What about Nokia? Their ratio is 0.22, so despite Nokia being worth more than RIM, the market thinks Nokia's sales are worth very little.

Now I hope you're starting to get a more clear picture of "cheap" versus "expensive". But we should still look at earnings, rather than simply revenue.

Price to Earnings (P/E): Forget revenue here ... let's look at profitability. How does the market value a dollar of profit from RIM? Well, its P/E ratio is 4.82. The higher the number, the more confidence the market has in a company's future prospects. And what about Apple? It's P/E is 13.8x, much higher than RIM. Clearly the market feels Apple's earnings are growing faster and are more stable than RIM's. And Nokia? You can't calculate their P/E based on the last 12 months. Earnings are negative. Companies that lose money have a market value based the hopes of future profitability.

Lots of other ways to look at stocks: The above discussion is very simplistic. We can get more complex by looking at trailing revenue and earnings versus forward projected earnings. You'd see that RIM's forward projected earnings are less than past earnings. That's a huge warning sign telling you they're struggling to tread water.

We should also be looking at the assets of a company (on its balance sheet). Apple has tons of cash, which artificially inflates its P/E ratio. So Apple isn't actually as "expensive" as it looks.

When a company is in trouble, analysts and investors start thinking about outcomes. Will the business recover? Or will it go bankrupt? Canadians worry that RIM is the next Nortel, but it's not a great comparison. Nortel was swamped with debt. RIM has no debt.

If the company can't recover on its own but isn't going bankrupt anytime soon, what happens? Do they get left for dead, slowly bleeding cash? Or do they get taken over by another player as a strategic investment? Do they get broken up for parts (patent value, infrastructure, etc)?

All of these potential outcomes (from A to Z) are possible for RIM. Obviously we hope the business recovers on the back of BlackBerry 10. But that won't happen until at least later this year, perhaps not until early 2013 once BB10 has a chance to start shipping in volume and catching on in key markets.

In the mean time, RIM is struggling, and faces a serious risk to its current profitability. And the stock seems to be not quite in free fall, but sinking lower steadily like a helium balloon a few days after the party ends.

How long can it go? Let's think about it's $5.5 billion market capitalization. They hold $1.7 billion in cash, and as of now they're still generating more cash every quarter. By next quarter perhaps we're closer to $2 billion in cash. That's 36% of the current stock price right there. But, if cash was the only backstop to the stock price it still leaves a TON of room for it to fall. And if profitability disappears in the next few quarters, while we wait for BlackBerry 10, the market will assume cash will dwindle.

Next up we've got other tangible assets. Buildings, real estate, and such. Forget the computers and other technology infrastructure. That stuff doesn't hold its value very long. But real estate does. RIM has about $1.5 billion in land and buildings on its balance sheet.

Finally, we have to include patents, which are intangible assets, but very important assets in an information business. RIM purchased a lot of questionable patents over the years, but most recently they spent $778 million on its portion of the Nortel patent purchase.

Adding up cash, real estate and the Nortel patents gives us almost to $4.3 billion, or about $8.30 per share. Could the stock drop this low? Yes, of course it could. Perhaps even lower, especially if profitability dried up between now and the BB10 launch. So if you're thinking of investing in RIM here you need to understand that it absolutely can drop much lower still. Never buy a stock when you don't understand the risks, and especially if you're not prepared to swallow the volatility. And most definitely don't buy a stock because somebody else told you to. If you buy RIM do it because YOU accept the risk and the responsibility of the decision.

Ok so with all of that said, what's my opinion? Not much has changed. It's close to being an all or none situation with BlackBerry 10. They either pull it together and prove that they can maintain a profitable business as a handset / platform vendor, or they don't. If they do, the current stock price will look like the biggest bargain of a lifetime.

But if they don't succeed they'll be forced to restructure into a much smaller niche player, possibly with a pure enterprise focus. They'll lay off a lot of people. They can probably be profitable, but much smaller. Restructuring costs money, eating up part of their balance sheet. The smaller size of the company and reduced cash balance might not be worth any more than the current stock price.

I don't want you to take this as a doom and gloom piece, because I was darn impressed with RIM at the latest BlackBerry World conference. I'm not selling my stock here. But I have lost plenty of money on it in the last year, and it wouldn't be responsible for me to sit here and write a piece telling regular investors to go buy the stock. Because you shouldn't unless you truly understand the risks and are willing to take 100% responsibility for your own financial decisions.