Here is how I think about RIMM and why the stock has value here. Previous fiscal year, RIMM made 2.22 per share which includes 350M in writedowns/impairments of inventory (about 15% of pre-tax income). Current estimates are at 1.95 which have declined but are probably a little too high (some analysts may have not revised their estimates yet, the high estimate out there is 4 and that is not happening). I suspect that earnings over the next year come in closer to being down 25% or about 1.75. To be more conservative, lets argue that RIMM earnings will be 50% of previous year or approx 1.10 per share going forward (ie not decline further after that). RIMM would trade for 12x earnings (13.20) while we would effectively buy at 12.31 (13-0.69).
So you will probably say that makes sense but RIMM is getting destroyed in the US, will they even be around in 5 years? The answer is yes, at least in some form, perhaps they are acquired at some point.
First, the mobile/smartphone is very different in the US vs the rest of the world. In most of the world, consumers pay full price for their phones and have no contracts. That is in contrast to the 2 year agreement standard in the US where the carriers subsidize the phones (an IPhone costs upwards of 500-600). Every few years (in the US) a new cell phone replaces an old cell phone, while internationally the cell phone replacement cycle is slower. Further, the phone is not usually retired but sold back to the store to be resold, or given/sold to a friend family member for continued use. RIMM has actually increased its subscriber count from 70M (2Q) to 75M (3Q) to 77M (4Q). Growth is slowing (with US declining) but international growth is still strong. Also, RIMM phones can still win the low end smart phone market as they will be priced lower vs most smartphones.
Second, we are not including any value for cash of 2.1B (33% of market cap) and no debt. We are also not putting in any value for patents held, even though we know the value is not 0. RIMM could be acquired for patents (plus the residual business) or could sell and/or license some of its patents for cash as well.
Third, throughout the world (including the US), RIMM is the most secure mobile phone. For instance, RIMM is the only device allowed to be used by the US Government. Many businesses are the same way with high level executives only using RIMM (protocol is called FIPS 140-2 link to wikipedia).
Fourth, there are many RIMM loyal/faithful that are waiting for new devices and do not want to switch from RIMM. When new devices come out, there could be a nice upgrade cycle that will help earnings short term (causing a beat and rally). Every company (including AAPL), people waited for a new device (like the IPhone 4S) that could pressure the next few quarters. Unfortunately, RIMM has not executed and lost some subscribers as the wait for Blackberry 10 (BB10) has been delayed multiple times.
Fifth, no value at all for Blackberry Playbook Tablet. While there is probably not any value, even if they sell at no profit that helps people stay on the platform and may help increase new smartphones which are profitable.
Where could I be wrong? The big risk is that BB10 could be delayed further, causing more RIMM 'faithful' to throw in the towel and get an android or iphone. The other major risk is in the international market where Android phones could possibly outprice RIMM phones.
If put RIMM stock, I would be happy to take the position and turn around and sell calls against it. If BB10 comes out on time and RIMM is still trading at this valuation, I would be more inclined to hold the stock outright and write calls at a higher level (18-20 level) and see if we can get a nice 50% score.
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