Is Research In Motion Turning Around or Sinking Down?

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Poor Research In Motion (Nasdaq: RIMM  ) has suffered an all-too-familiar fate. It was an innovative disruptor taking the world by storm. Anyone from a CEO to a 12 year-old was constantly typing away on the little black devices. Then the iPhone and Android devices unapologetically destroyed the company's BlackBerry product line. Now, the company is undergoing major renovations. It's the Lindsay Lohan of tech giants -- in rehab to finally get turned around. The first-quarter results haven't even come out yet, but the CEO is warning us -- it won't be pretty. Is RIM's rehabilitation going to work?

Tough break
After conference calls and press releases touting the company's commitment to innovation and bright future, CEO Thorsten Heins admitted in an interview with fan site CrackBerry that the company is in need of change. He disagreed with some investors' sentiment that the company should break up and sell off the assets, but acknowledged that the company's old path was not sustainable.

It was encouraging news to hear that the new CEO was ready to make fundamental changes. But when today's warning came out, investors lost all of their confidence. We know it will be a weak first quarter, but RIM is a long-term story. This news should not warrant today's sell-off. Let's look at what RIM is doing to dig itself out of tech hell.

When in doubt, throw 'em out!
Like many a troubled company, Research In Motion has been laying off workers. Around 2,000 people are on the chopping block over the next couple of months. RIM currently employs around 16,000 people, down from the 20,000 it employed in its heyday.

Tech companies have a tendency to become bloated when the income statements look pretty. But when the going gets tough, the tough get ... fired. Another tech behemoth, Hewlett-Packard (NYSE: HPQ  ) , has turned to layoffs to cut costs and improve company dynamics. The layoffs haven't proven effective, as the company continues to struggle; yet they are doubling down on the strategy. The company plans to lay off around 27,000 of its 350,000 employees. Layoffs are a tough tool for HP to use because even when delegated to departments and teams within the organization, deciding the "big picture" impact of a single employee is guesswork at best.

HP will lay off about 8% of its workforce. The RIM cuts are over 10%. It seems like a massive shedding, and it is, but RIM can better choose how it consolidates operations and becomes a more efficient machine if it's a smaller company.

The Storm is over
RIM's main problem: so-so products. The BlackBerry Storm -- RIM's attempt at an iPhone competitor -- was absolutely garbage. As a once-horrified owner of a Storm, when people asked me to "Google" something on my phone, I laughed. It would have taken less time and frustration to find one of the 10 remaining phone booths on Planet Earth, call my mother long distance, and have her look it up on a functioning device.

Now, Research In Motion is touting the BlackBerry 10 operating system and phone. The 10 is RIM's Hail Mary pass in the smartphone Superbowl.

The 10 got some good press. The new operating system is a slimmed down and refined version of RIM's tablet OS. It will be interesting to see if BB 10 can fight back against Tim Cook and his spaceship headquarters filled with the essence of success.

Backed by Canada's best
My most bullish argument, and I admit it's thin, is Prem Watsa's involvement. The CEO of Fairfax Financial (OTC: FRFHF) and Buffett-like Canadian investor owns over 5% of the company and has taken a seat on the board.

Though Watsa is not known for being an activist investor, he is known to be very risk-averse. In the last year or two of market bull-ery, Watsa was largely hedged -- a move which many of his critics called him out on. So with Watsa taking such a strong interest in the company, he must see some big opportunity. Ever the realist, he predicted the RIM turnaround story will likely take four or five years, and investors should not expect to see immediate change.

Tunnel vision
I like Watsa's honest approach to RIM: Let the reorganization take place, and buckle up in the meantime. Investors looking into this company should keep a close eye on every development to come out. With a four-plus-year investment horizon, it's easy to isolate a company and not consider general market considerations. Technology changes fast, and something could come along to put the final nail in the coffin. I don't see that happening, but never say never. RIM is not in denial about the situation, and it's taking action. The stock is trading incredibly cheap, and in my opinion, is worth at least a nibble until more information trickles in.

Maybe this one sounds like too much work. Maybe you have a life and don't have time to read every bit of RIM-related news trying to figure out what the heck is going on. Well, in that case, let me point you to our fantastic free report, "The Motley Fool's Top Stock for 2012" Our analysts have done the legwork for you, all you have to do is read it! Get your copy by clicking here.

Fool contributor Michael Lewis owns no shares of the stocks mentioned in the story above. Motley Fool newsletter services have recommended buying shares of Fairfax Financial Holdings. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days..

Read/Post Comments (4) | Recommend This Article (2)

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  • Report this Comment On May 30, 2012, at 3:36 PM, XMFMadMardigan wrote:

    @happy, its the unfortunate but ever-present short-term overreaction. I think RIM has a good chance to make the comeback they need, but its going to be a long road.

    We can use these market overreactions to our advantage as long term investors.

    Valuations for RIM's patent portfolio range from 2-10 billion. I would stay on the lower end around 2-4. Added in to the current assets-total liabs, and youve got a very limited downside risk here with great upside potential.

  • Report this Comment On May 30, 2012, at 3:46 PM, XMFMadMardigan wrote:

    Thats a tough argument, @infothathelp. If RIM shut the doors today and didnt get a penny for its multi-billion dollar patent portfolio, itd still be worth over $6 in a fire sale scenario.

    Its certainly a possibility that the company will not be successful in restructuring, but the liquidation value lets us know it cant go to zero.

  • Report this Comment On May 30, 2012, at 3:49 PM, XMFMadMardigan wrote:

    @infothathelp. Worst case liquidation of the company if it closed doors today would be around $6/share. Thats still a long way down from today's $10.80 but we know it wont go to zero.

  • Report this Comment On May 30, 2012, at 8:13 PM, melegross wrote:

    The problem is that some are making the assumption that RIM has tie by pointing at HP, Dell, and at what happened at Apple.

    But none of those scenarios are comparable. RIM is operating in a business that these days is moving too rapidly. They are also a one trick pony. And they have forgotten the trick.

    They are just not selling BB7 devices, so inventory is again piling up. Those BB7 devices can't be upgraded to BB10 when it arrives. And when will it arrive? It's goi g to be at least 6 month after it was led to be expected. But will it arrive then? It looks as though it might not.

    At the conference in May, it was reported that BBB10 seemed to be non functioning. That the few features that were allowed to be used appeared to be canned. In other words, small bits of the OS that functioned without the entire OS working.

    With the holliday shopping quarter being just 4.5 months away, it doesn't seem possible that this will arrive in time. The hardware was described as clearly unfinished. This will need to have FCC testing done, and that doesn't happen at the last minute.

    And what about a decent stock of native apps? When will they come?

    Of course, the Playbook is still failing to sell either. Will they have enough customers left by whenever their new stuff comes out? No one knows!

    I wish it weren't so, but it looks as though time has run out for RIM.

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