Research in Motion Value Play

In the past, we’ve discussed how it is that value investments are those opportunities that allow us to invest in assets that are trading below their true worth. In the interest of trading dimes for dollars, a value investor is often considered to be a contrarian, because a security that is out of favour is most likely to present a strong buying opportunity. However, a contrarian investor needs to be particularly sure about their due diligence, because it is always possible that they have mistakenly invested in a value-trap, instead of a value opportunity.

Such is the dilemma when evaluating Research In Motion as an investment opportunity. While the last article clearly explains how it is that RIM is fighting a seriously uphill battle, there is a strong case for RIM as a value opportunity for the patient and daring investor. In this counter-argument, I’m going to explain the case for why RIM might actually be begging the market to buy it on the basis of value alone.

The first thing to recognize about RIM’s incomes is the fact that a great deal of its income comes from international sales, corporate sales, and government sales. From the consumer’s perspective, the Blackberry has managed to maintain its position as a ‘luxurious’ item in less wealthy countries, where the ownership of an IPhone is generally out of the question. That being said, the unparalleled security aspects of the Blackberry have created a competitive advantage for the company.

This has allowing them to access both the US Government as Military as customers. Given the stringent nature of the requirements these organizations would have for their mobile devices, it is not likely that these customers would be changing to another supplier any time soon. Ignoring the North American sales of Blackberries in the consumer market so as to compensate for IPhone sales growth, RIM still maintains a valuation of twice its current price.

From a balance sheet perspective, it is also important to remember that RIM holds an extremely valuable portfolio of intellectual property. RIM’s patent portfolio has been valued at approximately $4 Billion, meaning that it has a very strong asset-base to leverage for creating returns. This intangible value has created rumours about whether or not a competitor will come in to acquire RIM. These rumours have been intensified even more lately, since the company hired M&A experts from Goldman Sachs to evaluate the company for strategies to ‘unlock hidden value’ for shareholders.

In finance speak, this generally refers to the process of spinning off divisions into smaller companies, selling the company out-right, or finding ways to create new revenues from existing assets. Given Goldman Sachs’ track record as an extremely effective consulting firm, investors have taken this move very seriously.

Given the value opportunity of RIM as an investment, it is fairly easy to understand that the dilemma comes down to a single issue. RIM’s ability to increase the distribution of its intellectual property, be it through new products or increased sales, will determine its stock’s performance. While I’m certainly in no position to say how the company will perform over the coming years, there will certainly be enough volatility for a clever investor to benefit from the ride.