RIM and Value, Again

July 23rd, 2012 by Potato

I keep coming back to look at poor unloved RIM, and I keep not buying it.

At one point I was openly wondering if it was a good buy, trading a hair above book value and some ridiculously low P/E. I even thought it was good enough for the misfit bloggers stock picking competition (good enough for fake money — now there’s a recommendation!). Then it fell lower than that even, and I still didn’t buy. It wasn’t due to any squeamishness about falling knives, but rather because the business outlook kept deteriorating just as fast if not faster than the share price. Not even a year ago I had figured that even if the BlackBerry brand was losing out to Apple and Android, it wouldn’t happen overnight, and there’d still be a year or two of positive earnings. Yet now they’re already reporting a loss.

A few months ago, I reasoned that they’d be worth the cash on the balance sheet plus some generous value for their trove of patents. After all, they had paid some billions of dollars for just a subset of the patents in the Nortel bankruptcy. Except, that line of reasoning kind of fell apart as I examined it: they were the highest bidder in the auction, so the patents would by definition be worth somewhat less than what they paid. Plus, those patents are a few years older and closer to expiry now. RIM’s own core patents might be valuable (they still do have some strengths)… but Apple and Google’s device manufacturers have had no problem moving product without access to those patents. How much could they really be worth?

So now I’m lowering my sights once again and demanding a larger margin-of-safety before buying. If the negative sentiment continues and the stock price continues to suffer then there may well come a time where I’m willing to buy. But now I think that point will be when the stock is trading at a discount to their cash: where I get the patents for free, the business for free, and a cushion to insulate against a few years of losses eating into that cash hoard. From a quick back-of-the-envelope calculation, I probably won’t be putting in any bids until I see it under $4.

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