Research In Motion (RIM)'s outlook for 2013 and beyond

A quick look at Research In Motion (RIM)'s stock price shows the much beating it has received in the past 8 quarters. The impending launch of the BB10 operating system and a roadmap showing 6 upcoming devices suggests that RIM may be back in business.

At the time of this writing (mid January 2013), the stock had risen based on a favourable news that BB10 was finally being released. In order to see what should be the ideal target price, I started on this exercise.

First things first. One of my sources is www.trefis.com. The live version of the Trefis price is shown below.

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Trefis price for Research in Motion:$11.98

For the purpose of the post, I considered it better to take screen shots of the site, so as to crop the content to highlight what I thought was significant. The main premise of Trefis is that the stock is currently overvalued and the fair price is $11.98. The distribution between the components' fair value is as shown below.

So after predicting RIMM's predicted cash flows for the next five years and discounting future earnings to their present value, Trefis feels the fair price of the stock is $11.98. That is lower than their market value for the day, which was $13.56 per share.

Going through the Trefis analysis in slight more detail, a few details baffled me about the assumptions used to determine the fair value of the stock in the analysis. These assumptions are

1. The continuously falling phone sales and total revenue
2. Missing the Enterprise story
3. What about the application store?

Trefis Analysis Issue 1: The continuously falling phone sales and total revenue

The revenue in the coming years (specially from the phone sales – shown in red in the chart below) keeps on falling, till the projected year.

In fact the analysts re-baselined the revenue from phone sales on the 2012 performance rather than treating 2012 as a dud year, where people did not buy RIM phones since they were waiting for BB10 OS and associated devices to be released. This of course also affects the Gross Profit and the Free Cash flow shown below.

The Free Cash Flow is particularly important since it will impact the Future Market Value and hence the fundamentals based stock price of the stock.

This is a far cry from the FCF generated by the company in the years gone by, and on which the stellar stock price was based.


The assumption of course made by the Trefis team that since the current market share and the associated trend in the last 12 months was negative, the market share would continue its downward trajectory to end at close to 1 % instead of the 3% in its prime.

I adjusted the trend line to reverse the market share trend predicting that the RIMM market share will soon revert to the original 3% by the end of the forecast time period. This is because in 2012, RIMM barely introduced any new devices and market was anxiously waiting for the nexy version OS. There have been 6 new models announced on the new platform after March 2013.


Another issue is of average price of a Blackberry handset. Here again, one can see a sharp decline in price between '09 and '12. This may be since RIMM would be pushing to get rid of inventory against th e impending launch of new devices. In my mind there is no reason why the trend should conitinue with the state of art hardware.

Trefis Analysis Issue 2: The missing Enterprise Story

This was my second issue. Trefis team assumed that the Enterprise E-mail platform was the only Enterprise offering on the cards. Now, the RIM management has repeatedly mentioned their strength in Enterprise security and a strong play in the corporate customers. I corrected this problem in my analysis as shown below by increasing the corporate users as percentage of total.

Another item should be the assumption of enterprise applications which is not included. I kep push E-mail capability as a proxy for the more detailed analysis and development that need to be carried out..

Trefis Analysis Issue 3: What about the application store?

Also, a quick glance at Apple and Google illustrates how much these firms value the App Store. In RIM's case this grouped with accessories and thrown in one group. I have been more generous with earnings per customer.

The final adjusted price came out to be the following, which I suspect will need some more effort.

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Arthgallo's price for Research in Motion:$17.94

More on this in later posts.

Update: In more recent posts, I have provided comments on RIM's new Operating System in BB10 as well as capabilities that are relevant to developers, both differentiating aspects of the platform.