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BlackBerry 10 and 2 Million New Subscribers

publication date: Sep 27, 2012
author/source: RJ Towner

CEO Thorstein Heins is optimistic about the future of BlackBerry maker Research In Motion (click ticker for report: RIMM). At the RIM developer’s conference, he mentioned that BlackBerry has the opportunity to become the third largest smartphone ecosystem in the world and that RIM added 2 million new subscribers in recent months. The stock also trades at a significant discount to book value, and its enterprise value of $1.5 billion is significantly lower than its market capitalization of $3.5 billion. Without question, RIM is priced for a considerable decline; if not...bankruptcy.

From a product perspective, RIM is in a tough spot. BlackBerry 10 has been delayed several times, and we think the new operating system will likely be less popular than iOS 6 (click ticker for report: AAPL) or Android (click ticker for report: GOOG). Further, even when new BlackBerry phones are released, the excitement generated by iPhone 5 will probably leave RIM, and most other hardware makers, in the dust. As we saw from Nokia (NOK), Apple has a tendency to make the product launches of competitors look immaterial. Additionally, with many iPhone 4 and 4S subscribers renewing contracts in the next several months, it will be tough for any hardware maker, let alone a less popular one like RIM, to gain market share in the US.

If the iPhone 5 upgrade cycle lasts for the next year, which is likely in our view, BlackBerry 10 will be a failure. Had it been released in March or April of 2012 before excitement over iPhone 5 was so overwhelming, then perhaps it would have had a chance. Still, the goal of becoming the number three ecosystem probably isn’t too much to ask for. Android and iOS are in a battle for market share—we’re ready to throw in the towel with regards to Nokia’s iteration of Windows 8 (click ticker for report: MSFT) at this point. There’s room for BlackBerry, but unfortunately, we think the room is on the low-end of the market, resulting in lower ARPU (average revenue per user) customers and a decline in brand perception.

Yet, BlackBerry 10 seems to be focused on the high-end and enterprise markets—two arenas where the firm’s existing clients seem less interested in its products. These areas offer high ARPU customers, as well as stickiness, but if the clients don’t want RIM products, it might be value-destructive for RIM to try to re-establish a presence in the market. However, the low-end market isn’t incredibly attractive for RIM either because it simply doesn’t have the manufacturing scale. We’ve also heard rumors about a merger with Nokia or an acquisition with Microsoft, but neither seems likely.

Perhaps the most unlikely, but best idea could be a merger of all three parties. RIM and Nokia merge, while Microsoft creates the software. RIM provides the security infrastructure, as well as brand, while Nokia brings the manufacturing scale and excellence, and Microsoft provides the new phones with high quality software. But again, this idea is purely speculative and highly unlikely. Plus, success would not be guaranteed under this scenario either.

Financially, RIM’s balance sheet remains strong, and it generated over $700 million in cash flow from operations during its 2013 first quarter. We’re anxiously awaiting second quarter results to see if cash generation is stable. The company’s $2 billion cash hoard also gives the firm a natural floor in its stock price (assuming there is no cash-flow burn). We think the company still has a compelling opportunity to make a dent in the low-end market in the US, and as a somewhat premium product internationally. However, we remain firmly on the sidelines as competition from Apple appears near-insurmountable at this time, and the firm's score on the Valuentum Buying Index (our stock selection methodology) remains middle-of-the-road.

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