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3 Reasons to Stick With RIM

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It's been a tough slog for Research In Motion (Nasdaq: RIMM  ) . The stock is down about 50% from its 52-week high, and today's earnings report -- if worse than Wall Street expects -- could push the stock to levels not seen since 2006 (the last time it traded below $36 or so).

But never fear, here are three reasons why a RIM sell-off might make a great long-term buying opportunity.

1. The stock is now ridiculously cheap
RIM is part of a group I like to call Rodney Dangerfield tech stocks -- tech stocks that (you guessed it) "get no respect." This group includes Microsoft (Nasdaq: MSFT  ) , Cisco (Nasdaq: CSCO  ) , Dell (Nasdaq: DELL  ) , and Intel (Nasdaq: INTC  ) . All are characterized by strong competitive positions, cash-rich balance sheets, and high returns on equity, yet Wall Street is practically giving them away at free cash flow yields above 10%.

RIM is no exception, the company generated record revenues (up 33.1%), record free cash flow (up 46.7%), and record earnings per share (up 38.8%) in 2011. Yet the stock is trading at a forward P/E of 5.3 and a free cash flow yield of 15.63%.

The only justifiable reason for this is that the market thinks the company's prior growth is unsustainable. This, I admit, is a near-certainty, as fierce competition from Google (Nasdaq: GOOG  ) and Apple (Nasdaq: AAPL  ) will make repeating RIM's previous growth virtually impossible. However, the question to ask isn't how fast can RIM grow, but rather just how bad can RIM's growth be and yet the stock still be attractively priced?

The answer is very, very bad. Let's assume for a moment RIM stopped growing altogether, and that RIM's annual free cash flow never changes from 2011's levels. In that case, the company would still be worth $29.7 billion, or $55.20 per share, assuming a 10% cost of equity. That's considerably higher than the $36.50 per share Mr. Market is charging for the company.

So, just how terrible would things need to be to warrant the current share price? By my calculations, RIM's free cash flow would need to decrease by 5% compounded annually from here to eternity. In other words, the market is pricing in negative growth of about 5% per year. As long as RIM doesn't have growth worse than -5% percent annually, the stock is still at least fairly priced for 10% returns.

2. Security features that 90% of Fortune 500 companies still want
One reason to think the company won't have that negative growth is that its proprietary security features are still very popular with its core audience. RIM's BlackBerry Enterprise Solution is still employed by 90% of Fortune 500 companies. While the BlackBerry is unlikely to recapture the hearts and minds of iPhone or Android users, our valuation says that doesn't matter as long as the current business segment stays intact.

It's possible Apple or Google could come up with a business solution to rival RIM's, but businesses would likely be hesitant to switch. Once an IT department trains its employees to use a certain platform (which is itself a hassle), I doubt it wants to reopen Pandora's Box if it doesn't have to. (Anyone who has ever had to teach their parents or grandparents to use a DVD player knows what evil I speak of.)

So go ahead, Apple and Google, make my day: Take the consumer market! As long as RIM's business niche stays intact shareholders have little reason to fear at today's price (see reason No. 1).

3. Nuclear-powered BlackBerries (or something like that)
QNX. Computer geeks genuflect at its very name. As Engadget's Tim Stevens' put it, "QNX is a decidedly efficient and bulletproof operating system that powers everything from jet fighters to, well, little black tablets." Tim forgot to mention nuclear power plants. And this powerful OS is now at the mercy of RIM since it acquired the eponymous company last year.

QNX made its RIM debut with the BlackBerry Playbook tablet, and will eventually power all BlackBerry devices. The change from the current BlackBerry O.S. to QNX is as significant an update for RIM as when Apple went from Mac OS 9 to Mac OSX. It's a complete overhaul, and will hopefully give RIM a fighting chance to keep up with Google and Apple in the toys department.

As you can see, there are still reasons to root for RIM. As long as RIM doesn't announce later today that Reptar destroyed the BlackBerry factory, or something else of that magnitude, I'd rather be a buyer than a seller of the stock.

Fool contributor Chris Baines is a value investor. Chris' stock picks and pans have outperformed 84% of players on CAPS (player name: cbaines2). Chris owns shares of Dell. The Motley Fool owns shares of Google, Microsoft, and Apple. The Fool owns shares of and has bought calls on Intel. The Fool has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, Google, Cisco Systems, and Intel. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Motley Fool newsletter services have recommended creating a diagonal call position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2011, at 10:28 AM, rrspsrme wrote:

    Thanks for a great analysis of the situation.

  • Report this Comment On June 16, 2011, at 10:54 AM, dorog wrote:

    Solidly to the point

  • Report this Comment On June 16, 2011, at 11:09 AM, NewConstructs wrote:

    Yes, nice article. I said the same things Tuesday:

  • Report this Comment On June 16, 2011, at 1:31 PM, deemery wrote:

    Remember, though, this is all -potential advantages- that are totally predicted on RIMM getting its act together and producing products that leverage to these strengths (e.g. corporate IT security) in reasonable time with reasonable quality and capabilities. The Playbook is NOT an encouraging start.

    I'd still bet on Apple and Android beating out RIM without a substantial change in leadership up there in the frozen north...

  • Report this Comment On June 16, 2011, at 2:00 PM, valuehunter007 wrote:

    QNX is interesting. However, can you explain about this - "Security features that 90% of Fortune 500 companies still want" - What are the specific security features that a Apple or Android device can't provide, or more importantly, can never provide in future?

  • Report this Comment On June 16, 2011, at 7:03 PM, jschwan1 wrote:

    Sorry, Chris but you've got this one wrong. I acknowledge your financial analysis but the reality is enterprise IT is moving away from RIMM in droves. Third party mobile device management vendors (i.e. MobileIron, Trust Digital, Good, etc.) allow for all the security capabilities you refer to for ALL major platforms (including iOS and Android) and are less expensive than Blackberry Enterprise Server.

    Developers are avoiding Blackberry like the plague. The SDK is terrible and the App World model is cloodgy and unrefined. The app experience on a Blackberry is primitive compared to iOS and Android. That's why there is 23,000ish Blackberry apps and 350K Android and over 500K iOS apps.

    Here's the last killer. The trend of enterprises moving towards Bring Your Own Technology Programs (BYOT). People don't want to carry around two devices. They want their iPhone or Android and don't want to lug around a crappy Blackberry in addition to them. And companies don't want to manage 1,000s of devices and plans, they rather pay a stipend. And with a stipend, very few (if any) are going to use it to buy a Blackberry.

    RIMM is dead. Unless they ditch their crappy operating system (yes I mean QNX) and either jump on Android or Windows Phone (like Nokia did) they'll be irrelevant in 5 years.

    Some more arguments can be found at my blog:

  • Report this Comment On June 16, 2011, at 9:00 PM, lucasmonger wrote:

    Having carried a number of Blackberries paid for by the company, I hated each and every one of them. When the iPhone came out, I bought one personally and ditched the Blackberry and don't regret it one bit.

    RIM appears to be doomed as they cannot compete with IOS or Android as it currently stands. How can they keep top line revenue and bottom line profit when their customer base is leaving in droves? Employees tolerated Blackberries when there was no other choice for email connectivity, but now the other smartphones have completely outmaneuvered RIM to oblivion.

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