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Research In Motion’s stock may look like a bargain, but looks can be deceiving.
RIM has seen its shares tumble by 71 percent since February, and many of its problems are well understood at this point. But the unlikely scenarios of a takeover or drastic strategy change suggest that the company will continue to be mired in its problems, leaving little opportunity for optimism, according to Sanford C. Bernstein analyst Pierre Ferragu.
Research In Motion
“On the one hand, we must admit RIM is today a bargain in many respects, and we can imagine new directions to get the company out of its current corner,” Ferragu said in a research note published today. “On the other hand, we don’t see any likely buyer out there, and a change in strategy or management is unlikely.”
A RIM representative wasn’t immediately available to respond to the research note.
The handset maker would make an attractive acquisition target. The company’s stock recently traded at around $20. Ferragu said that a company paying a 50 percent premium to buy RIM would get half of its investment back from the cash generated by RIM over the next three years just by its BlackBerry service fees.
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RIM’s BlackBerry user base grew by 40 percent to 70 million in its fiscal second quarter, and Ferragu values each user at $160. Multiple companies would be interested in that base, even if it meant just converting the customers to a different platform. Microsoft could acquire the company and its lucrative corporate customer base and switch them to the Windows Phone platform, potentially quadrupling the struggling operating system’s user base. Likewise, HTC could significantly boost its size, leapfrogging multiple players’ market share by buying and upgrading users to Android.
RIM also has spent $3.7 billion in intangible assets such as patents that could represent significant strategic value to any potential acquirer, Ferragu said.
Even a dramatic shift, such as a move to Android with BlackBerry services sold on top, would provide a catalyst to the stock, Ferragu said.
Sound good, right? But here’s the catch: none of the scenarios are likely to happen.
Despite rumors of takeovers, talks with investment banks about strategic options, investors agitating for change or a sale of its patents, and even Carl Icahn taking an interest, RIM will continue to be controlled by its co-CEOs, Mike Lazaridis and Jim Balsillie, who also happen to be the company’s two largest shareholders. With an entrenched management, the company is stuck on its current course.
Which means RIM will still have to sort out its myriad of problems. The company waited too long to push out its latest generation of BlackBerry smartphones, which, while well reviewed, aren’t considered a match for the more advanced Android devices or the iPhone. Instead, RIM had put its resources behind the PlayBook tablet, which flopped in its debut and has required promotions and discounts from RIM and its retail partners to move.
The next-generation software that powers the PlayBook, QNX, will also show up in RIM’s planned line of super smartphones, but they aren’t expected to show up until next year.
Ferragu said he believes RIM has missed its chance to regain its position as a high-end smartphone maker, and expects its market share losses to persist. In addition, he doesn’t believe QNX will shake up the market, and expressed concern about RIM’s use of its cash.
“Given the context, we expect investors to lose all confidence in RIM’s earnings power,” he said.
