Another attempt at a Research in motion sum of the parts valuation

3 mins. to read

The following piece from Seeking Alpha caught my eye. Although patently the author is long the stock and perhaps some of his rationale is skewed, the net breakdown of valuation large mirrors our assessment at SBM. Take a look and form your opinion. Remembering the investment adage – “the value is created in the buying” (ie pay the right price for the asset and time will take care of the rest), we wonder just how much more pain RIMM shareholders have left…

After issuing their latest guidance, Research in Motion’s (RIMM) stock fell to a 9-year low with market prices fluctuating in the low $7s. 1-yr price chart is shown below.

Small Price Incorporates Worst Expectations

With a market price of $7.35, RIMM is trading at a total market cap of $3.85B. Taking away the net cash position of $2.2B, leaves a $1.65B price tag for the rest of the enterprise. All of RIMM’s patents, existing infrastructure, and massive subscriber base could be theoretically bought at this price.

Theoretically, if RIMM CEO Thorsten Heins announced tomorrow that Research in Motion was abandoning BB10 completely and selling itself completely off, the stock would double, perhaps triple, instantly. If the stock failed to skyrocket in mere seconds after this theoretical scenario, a huge arbitrage opportunity would be available to any investor who could click the ‘buy’ button fast enough.

The Upside (Sell Off!)

Why so much upside potential? Research in Motion has a lot to offer potential buyers.

Cash (and eqs): is the most tangible at $2.2B.

Patents: Many investors were shocked last fall when RIMM’s patents were speculated to be worth “only” around $2.5B; however, the true valuation will only be known following a selloff. Assuming a floor of $2B should be ultraconservative especially after hot-market signals including recent purchases by Google of Motoral – $12B and Microsoft of AOL’s. $2B

Handset Business: A new purchaser could license the Blackberry-line towards the news Windows 8 (Microsoft already offered a partnership earlier this year and Microsoft has prior history with a search partnership). BB phones could also be licensed to run Android software. Floor value of $1B

Messenger Network: Former CEO, Jim Balsillie, wanted to license BBM to the Apple (AAPL) iOS system and possibly to Google’s Android software, but his reinvention plans were brushed aside. Rumors have also surfacedabout a potential split-up, but RIMM has been plagued with rumors for the last 2 years or so. If this network was licensed out, I expect a minimum valuation of $1.5B

For the sake of remaining conservative, I will value the rest of RIMM’s entire enterprise at $0. No future positive cash flows, nothing else.

In this worst-case outcome, RIMM is worth $6.7B or $12.79.

…But it’s Not THAT Easy… Is it?

Many analysts are claiming that Research in Motion could burn through their cash pile next year through implementing the BB10 launch (recently delayed to Spring ‘13). RIMM has responded by searching for $1B in savings by chopping 5,000 jobs and cutting other programs. Worst case scenario, BB10 flops. RIMM finds themselves almost cashless next summer.

RIMM is still worth $4.5B, or $8.98. This is insanity.

Do they have a Chance?

Who cares? It doesn’t matter anymore. The absolute worst case scenario can unfold (BB10 utter flop, $2.2B net cash destroyed) and buyers at today’s prices will still make a small profit.

Utter destruction is already priced in. Bankruptcy? RIMM has zero debt.

Sentiments are Beyond Dismal

In the past two weeks, I’ve yet to read one positive comment about Research in Motion. Most quotes are a variation of the Lynch wisdom “do not bottom feed” and “the trend is not your friend.” I do not trade based purely upon sentiment, but this is an interesting touch. I’ll take a chance like RIMM at $7.35 any day. Apple and Google have stolen the smartphone spotlight, but don’t forget that even last-minute shareholders of debt-laden and disaster-prone Palm Inc made money off their investment.

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