Thursday, January 31, 2013

A Good Opportunistic Technology Bet in 2013

Research In Motion (NASDAQ: RIMM) has experienced a lot of volatility in the past two months. After it announced the plan to launch Blackberry 10 operating system for its own newsmartphone in the end of January 2013, Goldman Sachs upgraded the stock from “neutral” to “buy”, the stock jumped significantly and climbed from $6.30 at the end of September to $14.12 in December 20th. Then the company announced its plans to change the fee service structure, making investors worry about the company’s fundamental in the future. The scare has driven RIMM deep down to $10.91 per share, a daily loss of nearly 23%. Many investors might ask what they should do with RIMM? Let’s find out.
Results Beats on Shares Sluggish
In the third quarter earnings results, RIMM has beaten the estimates in terms of revenue, adjusted and GAAP income. The revenue came at $2.7 billion, a 47% year-over-year decline, but it beats the estimate of $2.65 billion. Wall Street thought the loss per share in Q3 2013 would be $0.35 per share. However, RIMM has posted the net adjusted loss of $114 million, or $0.22 per share. RIMM recognized the GAAP profit for the third quarter, $9 million, or $0.03 per share, due to $226 million recovery of income taxes. In this period, 6.9 millionsmartphones and 255,000 PlayBooks were shipped, along with the subscriber base of around 79 million users. The cash generated from operations was $950 million, thus, the cash on hands increased by $600 million to $2.9 billion in the third quarter.
Blackberry 10 Launch
Many subscribers, analysts and investors are waiting for the launch of the Blackberry 10. Blackberry is extremely well known for its high level of security. The Blackberry 10 has won Federal Information Processing Standard 140-2 certification for government agencies usages. Thus, US government agencies could use to share and/or transfer sensitive information. Blackberry has lost its customers to Apple (NASDAQ: AAPL) and Google’s Android platforms due to the lack of user friendliness and browsing convenience. Hopefully the upcoming Blackberry 10, with the user friendlier functions including Blackberry Hub for improved messages, Blackberry flow for a better user experience, time shift, could address that issue. By launching Blackberry 10 platform, I think RIMM is leveraging its core competence, the security for enterprise customers.  
More Customized Service Revenue Model
RIMM has generated its revenue via two main sources: hardware revenue and service revenue. In the third quarter, hardware revenue was around $1.6 billion, or 60% of the revenue, whereas service revenue was $974 million, accounting for 36% of the total revenue. In the recent conference call, CEO Thorsten Heins said that the company would change its service revenue model to better customize users’ needs. Along with the communication services, the company intended to offer a range of other services such as mobile device, application management and security. Personally, I think the “menu” catering service might dampen the short-term service revenue for the company, but in the long run, it would be more users customized and attractive to users as it offered flexibility, which suits users’ choices, instead of one-size-fits-all approach. Furthermore, Heins clearly addressed the potential growing trend, Bring Your Own Device to Work. The service menu would address that in the long run, along with RIMM’s new work/personal firewall features. 
Far Behind Other Two Big Players
In the global smartphone market, the two biggest players are Apple (NASDAQ: AAPL) andSamsung’s (NASDAQOTCBB: SSNLF). According to IDC, in the third quarter, Samsung shipped 56.3 million units, representing for 31.3% global market share, a 100% increase from 22.7% market share in the third quarter last year. Apple ranked behind Samsung insmartphone’s battle, with 15% of the market share. RIMM ranked the third, with 4.3% global market share. However, RIMM was quite cheap compared with the other two. RIMM is valued at only 2.2x EV/EBITDA, whereas Apple has 7.85x EV multiples and Samsung is valued at 4.51x EV/EBITDA.
Foolish Takeaway
Indeed, at the current price, RIMM was valued even less than its liquidation value, including the patents, subscriber base and its platform and infrastructures. I would consider RIMM could be an opportunistic play for long-term investors in the coming 2013.  
Disclosure: Long RIMM

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