As all of you loyal CrackBerry readers know, RIM hasn't exactly been impressing stock market professionals. The stock has dropped almost 70% this year alone, and there have been a bunch of stories written this week about how RIM is now trading below "book value".
I've got two goals with this article. The first is to help novice investors understand what all of this stock market talk means. The second is to engage in a discussion as to whether the horrible stock market performance is deserved. Yeah, we all know RIM has disappointed us this year. But does the stock really deserve the metaphorical teeth-kicking that it's had?
Among the Wall Street crowd (and Bay Street in Canada), I've followed RIM for longer than most analysts. Over 10 years now ... and counting. But that doesn't make me right, just well-educated on RIM's history. I've been right and I've been wrong plenty. Lately, on RIM, I've been more wrong. But as we'll discuss, the market is highly volatile and I take a longer term perspective than most investors. I bought stock twice this year and I'm still holding onto every share I've ever owned over 11 years now.
Let's talk about the stock. Last night it closed at $18.85 on the NASDAQ. That's a per share price. The value of the entire company is $9.8 billion. In other words, theoretically, if you wanted to buy every share of RIM (and own the whole company) you'd need $9.8 billion. For comparison, Apple is valued at $374 billion, or 38 times more than RIM.
In the stock market, people find it easier to refer to per-share values, so instead of saying that RIM made a profit of however many billion dollars, we divide by the number of shares that exist and call it earnings per share (EPS).
Profitable companies, like RIM, are usually valued on some multiple to their earnings. Analysts believe RIM will earn $4.77 in EPS this year. Normally, if a company had low growth but a somewhat stable business model, the stock might trade at 10x earnings. So that would be $47.70 per share. But RIM actually trades at only 4x analyst earnings estimates.
This tells us investors think analysts are still way too optimistic. Investors believe RIM won't make a comeback with BB7 devices, and surely won't make a comeback after that with BBX devices. In other words, the market doesn't believe RIM has a stable business model at all.
Another way to look at the stock is called "book value". The first word "book" refers to the company's balance sheet, or the listing of assets and liabilities. The assets minus the liabilities is the accounting value of a company. Again, it's usually expressed as a per share value to keep things simple.
RIM's latest quarterly report reveals a book value of $18.92 per share. About 70% of this book value comes from "hard assets" like cash, money owed by customers, inventory, buildings, and equipment. The other 30% comes from so-called "intangible assets" like patents. Usually when a company's stock price is in the toilet, investors pay no attention to intangible assets. But in RIM's case, everyone knows the value of the company's patents is an important consideration.
The fact that RIM now trades slightly below its book value is another sign that investors don't think RIM will be able to make much money in the future. The stock market is clearly betting that RIM's profits will totally collapse. If you happen to disagree with that conclusion and you end up being right, you will probably make a lot of money on the stock.
I'm not giving advice here, but I have personally taken the view that the market is wrong. Sure, RIM is in a heap of trouble right now and the company has its work cut out. But they also have 70 million BlackBerry subscribers, and that number is climbing by about 5 million per quarter. Aside from the US market, they're doing quite well. Despite all of the competition from Android and iOS, there are still huge numbers of people who prefer QWERTY keyboards and love BBM. RIM owns that market.
Benjamin Graham is an old-time guru value investor. He is famous for saying that the stock market acts like a voting machine in the short term, but a weighing machine in the long term. Right now the market is voting against RIM. But how will it play out longer term?
But the market isn't perfect. It massively overvalues companies at their peak, and it massively undervalues companies at their trough. My own opinion is that the market is massively undervaluing RIM right now.
That said, RIM has done an absolutely horrible job of making its case. There is a reason investors have lost faith. Communication has been a disaster. They've consistently missed their own product launch targets. They've consistently fallen behind the competition on features. They take 3 days to get around to making any kind of public statement when their network goes down. They hold a developers conference where one co-CEO says they'll announce a leapfrogging of the industry while the other co-CEO comes up on stage and announces pretty much nothing.
In short, RIM deserves to be punished, and punished hard. They need to get their act together. They may even need more management restructuring than I've been willing to admit. But RIM is the #3 smartphone operating system on the planet and the #2 smartphone "platform" when we consider that only RIM and Apple control their entire platform (Android is software, and hardware partners make the devices).
As an investor, I'm a fan of the KISS principle. Keeping it as simple as possible, RIM either fails to make the jump to BBX, and essentially dies, or they succeed in remaining relevant. Being relevant might mean the #3 smartphone OS. It might mean being #4 behind Windows Phone. But so long as they are relevant, they should be nicely profitable. Profitable companies don't trade below book value in the long term.
Disclosures: I own shares of RIM, Apple and Google.
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