RIM: Is This $13 Stock Out Of Gas?

by Larry Gellar

Research In Motion (RIMM) had some interesting things to show at its recent BlackBerry World conference, but there wasn't enough to push my feelings about the stock toward a "buy" rating. The key development was Research In Motion's enthusiasm about its newest software, which even had the company giving developers free phones running a beta version. The latest features include new predictive typing technology and a camera option that allows users to "turn back time" to select an image they may like better.

Needless to say, these abilities are not exactly earth-shattering. While Research In Motion's consumer-oriented plans still are not anywhere near Apple (AAPL) or Google (GOOG), the company does provide useful software and services to large corporations and government organizations. Given this tradeoff, I cannot bring myself to recommend a purchase of the stock, but I don't see enough downward movement to justify a short sell. In other words: If you already have the stock, keep it, but otherwise just ignore it.

The interesting thing about Research In Motion is that its statistics point to a very cheap stock, but there are enough problems to make you think otherwise. It's the type of situation that suggests Research In Motion is not a particularly valuable company unless one of the major tech companies buys it and can maximize the relevant synergies. Regardless, let's take a look at some key statistics. Compared to Nokia (NOK) and Motorola Mobility (MMI), Research In Motion offers low price-to-earnings (6.15), price-to-book (0.74), and price-to-sales (0.41) ratios. I admit it's not a perfect comparison because Motorola Mobility's price has been inflated by its pending deal with Google, but these numbers should still be considered. Additionally, Research In Motion boasts better margins than Nokia and Motorola Mobility -- those numbers are 6.31% net profit, 35.69% gross, 11.18% EBITD, and 8.08% operating.

Despite those good statistics, there were a number of signs at the BlackBerry World conference that Research In Motion knows it needs to change if it wants to avoid a meltdown. When the company itself is this worried, it's hard to justify buying the stock. For instance, one important theme at the BlackBerry World conference was that the new QNX BlackBerry will be very much different from its older counterparts. Indeed, QNX is Research In Motion's updated operating system, and most of the old BlackBerry apps won't work on it. That may not be a problem, seeing as QNX will work with a number of open-source coding languages, but even the new product's physical features are completely different. While the vast majority of BlackBerry models boast a physical keyboard, the model that Research In Motion handed out at the conference did not have this feature.

I'm not necessarily opposed to these changes, but it's certainly unfortunate that Research In Motion feels this is its best chance of succeeding. Research In Motion's biggest obstacle will be the apps that are available for the new phone. Microsoft (MSFT) has a similar problem with getting its Windows Phone going, but many of the phones that run that operating system are reasonably priced. I've always seen Research In Motion as a player in the higher-end market, and having a wide assortment of apps will be crucial for it to keep its position. Research In Motion is working with some software makers to ensure at least some good apps are available, and Gameloft will even port 11 games to the new system.

At the same time, however, the app statistics for Research In Motion's current set of products pales in comparison to those of Apple and Android. For instance, the Playbook has a total of 85,000 apps, 70,000 of which also work for Research In Motion's smartphones. On the other hand, the iPad has 700,000 apps, 500,000 of which also work for the iPhone. Another fascinating number is the percent of developers that told a recent survey from Appcelerator and IDC that they were "very interested" in creating apps for each operating system. Apple had 90% and Android had 80%, but Research In Motion only had 16%. IDC has also reported that Research In Motion had 13.6% of the global smartphone market in Q1 2011 but only 6.7% in Q1 2012.

Even Research In Motion's board members have fully acknowledged the company's plight. Famous Canadian investor Prem Watsa, who is now on Research In Motion's board of directors and one of the company's largest shareholders, recently had this to say:

Is it going to turn around in three months, six months, nine months? No. Three years or five years is how I'm looking at it. But there's no guarantees. You've seen all the earnings from Apple. It's not easy to compete with Apple or Samsung or the Android group of companies.

Considering how much can change in three to five years, I think it's pretty obvious this is not the best stock to buy right now. While current shareholders may be able to ride out the storm, the BlackBerry 10 is going to have to really make a splash in order to get things turned around.

One last thing I'd like readers to turn their attention to is Research In Motion's statement of cash flows. For the fiscal year ending in March, Research In Motion experienced a net outflow of $264 million, although operating inflow was $2.912 billion. Capital expenditures during the year were an enormous source of cash outflow, which is good because it's going to take a lot of spending to get this company back in the game. At the same time, Research In Motion does not have any debt. That tells me that while the company may not have much growth ahead of it, it is at the very least in a solid financial position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.