August 01, 2011 - 6:10pm EST by
2011 2012
Price: 24.87 EPS $6.33 $5.19
Shares Out. (in M): 524 P/E 4.0x 4.8x
Market Cap (in $M): 13,103 P/FCF 4.6x 5.4x
Net Debt (in $M): 0 EBIT 4,475 3,536
TEV ($): 10,714 TEV/EBIT 2.4x 3.1x

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RIMM was founded in 1984.   The company designs, manufactures and distributes mobile solutions across the world.  As of Aug 2011, the firm distributes cell phones in 175 countries and the Playbook tablet in 18.    It is led by Co-CEO Jim Balsillie and Co-CEO Mike Lazaridis (founder).  

RIMM has dramatically dropped in value over the past few months and is now at $24.6/share (RIMM US).   I had never been interested in the company because of its valuation.   But as the price crashed I poured over the financials and news reports, including market research reports, and I noticed two things: a) valuation is absurdly low even under extreme scenarios, and b) yes, the company will see significant competition from Android and Apple but the market is overreacting.  I have now made it the largest position in my portfolio.

For every bullish article there are 20 bearish ones, and sell-side analysts have followed the trend with constant downward revisions.  The company should've never traded above $100.   But anything under $35/share is pricing a very pessimistic scenario.   

1.    Business performance, backward looking

2.    Market Outlook and revenue projections, fwd looking

3.    Valuation under stressed scenarios

4.    Other/upside potential


1.    Business assessment


9yr, 5yr and 3yr CAGR:  60%, 57%, and 49%

2011/2010 sales growth:  33%.  

FYQ1 YoY sales growth: 16% (67% YoY international revenue)


Sales by geography:  US 40%, UK 11%, Canada 7.1%, Other International 43%

2011/2010 sales growth by region:  US -9%, UK 53%, Canada 67%, Other International 109%.


Sales by product:

Devices: 80%

Services: 16% (recurring mostly)

Software: 2%

Other: 1%


Devices sold in 2009, 2010, and 2011:  

# of units:              26mm, 37mm, and 52mm.

Avg selling price:      $349.00, $330.00, $305.00


For FY 2009, 2010, and 2011

Gross margins:        44%, 42%, 42%

EBITDA margins:      28%, 27%, 28%

Profit margin:          17%, 16%, 17%


ROA:                      28%, 27%, 30%

ROE:                      39%, 36%, 41%

ROC employed:        56%, 52%, 58%


CF from Operations:

9yr, 5yr and 3yr CAGR:  83%, 93%, and 36%


Balance Sheet:

-      No debt

-      $2.9 billion in cash (22% of market cap.  $4.05/share)

-      Tangible book value: $11.06/share

-      Shares outstanding in 2009, 2010, and 2011: 566mm, 557mm, 524mm


Looking at the business through the rearview mirror and the facts (not opinions) this company is very strong - over many years RIMM has grown sales, has been able to sustain margins, increased ROA and ROE, and keep strong cash flow.   In addition over the past 3 years the company has continue to invest in R&D and reduced the number of shares outstanding through buybacks.   The firm has no debt and a very strong balance including $2.9bn in cash. 


2.    Market Outlook

There are two trends that will affect RIMM going forward:  

a)    Growth in smartphone market (tailwind)

b)    Higher competition, especially from Android and iOS in the smartphone market (headwind)


Smartphone penetration Worldwide (figures from eMarketer):

2010   2011   2012   2013   2014

US                33%    37%    44%    51%    55%   

Canada         31%    34%    40%    47%    50%

UK*              18%    20%    23%    29%    32%

West. Europe 28%    32%    37%    44%    49%

South Korea   15%    17%    21%    25%    30%

China            11%    13%    15%    18%    21%

India**             5%     6%     8%     10%    12%   

Other AsiaPac  8%     9%     10%    11%    12%

CEE              7%     9%     11%    14%    16%

Japan            4%     5%     6%     7%     8%

ME & Africa   3%     4%     5%     6%     7%

Latam           1%     2%     2%     3%     3%

Worldwide    10%   11%   13%   15%   17%                          

* 22% of UK consumers had a smartphone (March 2011) (Android holds 45%, RIMM 22%, and iPhone 18%)

**In 2009 RIMM held 9% of the smartphone market, and this grew to 13% in 2010.  

RIMM grew by 61% in India, with more sales in Q4 2010 than all other Quarters combined.  Smartphones are expected to grow by 10million in 2011 (9 million in 2010).  India's total mobile market (not only smartphones) grew by 15% last year.  As of May 2011 RIMM slashed prices in India to attract an even bigger audience and continues to gain traction.   [The Indian mobile industry is the fastest growing in the world and India continues to add more mobile connections every month than any other country in the world.]

In some markets, there is an extreme shift from non-smartphones to smartphones.  According to Nielsen, the following percentages indicate the amount of users that do not own a smartphone but will buy one in the next 12 months (as of May 2011):

Indonesia: 51%

Thailand: 47%

Vietnam: 46%

Malaysia: 45% (11% of buyers will buy a Blackberry.  Currently 1% of all mobile phones are Blackberries)

Philippines: 40%

Singapore: 39%

Of these new consumers, 58% preferred Nokia, 37% preferred Apple, and 20% preferred Blackberry.


RIMM's shipments in FY 2011 (according to RIMM's financials):

Canada:         3.7 million

UK:                5.8 million

US:              20.6 million

Other/Int'l       22.2 million

Total:              52.3 million

Average sales price/unit: $305.00


Revenue projections

Using the market data above we can project a conservative scenario for RIMM's unit sales. 


Conservative assumptions:

-      Canada smartphone market grows by 5% but RIMM loses 5% of market share 

-      US and UK smartphone market grows by 5% but RIMM loses 20% of market share

-      Other international smartphone market grows by 15% but RIMM loses 5% of market share

(Notice that markets are in fact growing faster than what I'm projecting)


Projected shipments for FY 2012 under our conservative scenario:

Canada:  3.7 million units

UK:         4.9 million units

US:         17.3 million units

Other Int'l 24.2 million units

Total:       50.1 million


Let's assume that because of competition, average sales price per unit drops by 10% to $275.00 (and we assume no cost reduction).

This would equate to a projected revenue (only from mobile phones) of $13.8bn.

From 2011 to 2014, smartphone penetration is expected to grow from 11% to 17% (that's more than a 50% increase).  The smartphone market continues to be attractive even under increased competition.   Even though RIMM may see market share decline everywhere, it is most likely that it will continue to grow in absolute terms in international markets.   

3.    Valuation, absurdly cheap

Current P/E 3.87x

P/E excluding cash 3x

EV/T12M EBIT: 2.3x

EV/T12m CF: 2.6x

EV/T12M FCF: 3.7x

Market Cap: $13bn, EV $10.1bn, Cash & Equiv: $2.9bn.


Stressed scenario:

-      RIMM continues to lose market share in US (20% loss), UK (20% loss), and Canada (5% loss)

-      Continue to lose market share in international markets

-      Lower avg selling price/unit (10% drop in price with no cost reduction)

-      Compression in margins

-      Half of service revenue is lost immediately

-      All software and other revenue is lost immediately

-      No new product launches 

-      Playbook will not be able to compete with iPad - 0 revenues from Playbook

-      Reduction in developer base and no new killer blackberry apps

No benefit given for the development of QNX (new software) phones


Revenue breakdown by product:

Feb 2011 (actual)     Projected

Devices: 80%          $16.0bn                  $13.8bn (from conservative assumption above)

Services: 16%         $3.1bn                    $1.6bn (half of FY 2011)

Software: 2%           $294million              $0 (to be extra conservative)

Other: 1%               $460 million             $0 (to be extra conservative)                                                       

Total Rev                   $19.9bn                     $15.4bn


Let's assume that EBITDA margins drop from 27% to 22% and profit margins go down from 17% to 12%.

Stressed EBITDA:  $3.4bn

Stressed net Income:  $1.8bn

Stressed CF from operations:  $2.9bn 

Even under this stressed scenario the business would be trading at a P/E of 6.8x, and P/E excl cash of 5.6x. 


Stressed and simplified DCF

- Cost of capital: 10% (in a low interest environment it's hard to justify higher rate)

- 3 years of constant stressed CFO (mostly driven by continued growth in the industry.  This implies a continued drop in market share).  We assume that by 2017 RIMM is worth zero.  Remember that CFO from operation in FY 2011 was $4bn.

2012 2013 2014 2015 2016 2017 Terminal Value

CFO growth 0% 0% 0% -25% -25% -25% -100%

CFO $2.9bn $2.9bn $2.9bn $2.2bn $1.6bn $1.2bn $0

NPV (10%) = $10.5bn [Current EV is $10.1bn]

Even under the very extreme scenario, you're paying negative for the business.  

This scenario allocates 0 value to Intellectual Property, assumes no cost reductions (RIMM announced already a 11% workforce reduction), assumes no reduction in R&D spending, gives no benefit to the Playbook sales, software and other services.   Assumes no benefit for the 5% share buyback. 


Other ways of looking at valuation:

i)   If RIMM traded at the same multiple as Nokia it would be valued at almost 4x the existing price (and Nokia has debt).

ii)  All of the US revenue is immediately lost.   P/E under such scenario is less than 8x P/E 

iii) FV is somewhere between $40/share and $80/share depending on how bullish you are on the smartphone industry, RIMM's technology, management execution, etc.


4. Other

- In June 2011, management announced a repurchase program of 5% of shares outstanding 

- The user interfaces of RIMM still lag behind Android's and Apple's.   However, the back-end technology and encryption software developed by RIMM is highly competitive (actually better than Android and iOS).  In addition, Blackberry has developed a strong distribution network across the world and is able to sell phones at a much lower price point than others (especially iPhone).

- BBM (Blackberry Messenger) continues to be a strong driver for consumer purchases.   BBM also has opened its platform so that developers can access the network and embed BBM within games, apps and software.


Possibilities for upside

The valuation is so depressed that as long as anything  goes right, the shares have significant upside.  I'm not predicting any of these, but heere are a few possibilities:

- Order of Playbook tablets by a government or large institution

                - Playbook is the only tablet that has received FIPS from the US Government

- Russia has stated that it might ban the iPad from government use because of security concerns

- Playbook is the only tablet to have received approval from the Australian authority for Govt use.

- RIMMs international growth continues to do well (YoY Revenue growth from international markets was 67%.  India is seeing good sucesss with the new Blackberries)

- Management teams up with a PE firm for a buyout of the business

- Microsoft, Google, Infosys, IBM, Nokia, Samsung, Amazon, Cisco, Facebook or any other company takes it over.  (Not unreasonable when you realize that RIMM just fired 11% of the workforce and the COO is retiring.    Ballmer dodged a question about a takeover of RIMM.  As you may recall from Skype's acquisition, a good portion of employees were let go immediately afterwards.)

- RIMM splits the business in two (manufacturing and software) and unlocks value (suggested by an Analyst).

- RIMM increases buyback or starts issuing a dividend

- As Mark McKechnie, an analyst at ThinkEquity, suggested... the company opens up its secure network operations center, or NOC, to other smartphone platforms.

- Sale of patents to Google or other interested parties


- Management already announced a buyback of 5% of shares outstanding.

- Earnings report (market is pricing an extremely bad scenario)


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