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The new BlackBerry 10 smartphone. (NATHAN DENETTE/THE CANADIAN PRESS)
The new BlackBerry 10 smartphone. (NATHAN DENETTE/THE CANADIAN PRESS)

strategy lab

RIM shares are cheap, but risks abound Add to ...

Chris Umiastowski is the growth investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

Research In Motion Ltd. will be holding its annual general meeting today, surrounded by an ocean of negative sentiment. As a shareholder, I’m watching developments closely to determine whether the stock still deserves a place in my portfolio.

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First, the negatives. The company – which is expected to approve a name change to BlackBerry at the meeting today – is, at best, a turnaround story. As a growth investor, I generally look for rapid expansion in key metrics, such as cash flow (for more mature companies) or revenue (for emerging firms). RIM doesn’t qualify on either count and hasn’t for a while.

Back in September 2012, when I launched my Strategy Lab growth portfolio, I excluded RIM because its revenue, earnings and gross margins were under pressure; the only key area where it was showing some growth was in its subscriber base.

Within two quarters the subscriber base had also started to decline. After hitting a peak of 80 million customers, it faded to 79 million the following quarter, then 76 million and most recently 72 million, as disclosed on last week’s earnings call.

To be sure, the revenue picture has started to brighten. The company is growing again: It pulled in $3.1-billion in revenue in the most recent quarter, up 15 per cent from three months earlier. Much of the growth is happening as a result of the global launch of its BlackBerry 10 hardware.

The BB10 product lineup includes the Z10, a touch-screen model that I happen to use and like, and the Q10, which sports a physical keyboard. Shipments of the devices are below analysts’ expectations, but it’s still encouraging to see the company once again show revenue growth of any kind.

Unfortunately, that doesn’t make it a growth stock in my book. The company’s bump-up in revenue is happening because a portion of the company’s loyal customer base have been longing for an upgrade. While they’re driving sales for now, the declining customer base tells us that RIM is still losing more customers than it wins over to its mobile computing platform.

As a growth investor, I’m unimpressed. Sure, RIM could generate very strong sales of its newest devices and even return to a respectable profit margin. The stock may even be cheap. But until I see more customers walking in the door than walking out, I won’t look at the stock for my Strategy Lab portfolio, where my mandate is to search for promising growth stocks.

Value investors with a big appetite for risk may have a different view. The stock is cheap, especially after declining 33 per cent in the week following the latest earnings report. RIM’s market capitalization is about $5-billion, it has no debt, and its coffers are bulging with $3.1-billion in cash. Add in a solid portfolio of intellectual property and those 72 million BlackBerry users, and it’s possible that the company could yet turn things around.

One strength is the company’s BlackBerry Enterprise Server, a software platform that large companies can use to manage employee devices. RIM has recently launched something called the “Secure Workspace” for Apple’s iOS and Google’s Android, and has an opportunity to collect fat-margin service revenue by selling this solution to employers who allow their employees to bring their own smartphone to the workplace.

Yet there is a reason the stock appears to be so cheap. Execution has been lacking. I’m not impressed with the firm’s marketing. I still see too much evidence the company is willing to accept mediocrity rather than come back to the party with products that exhibit pure excellence.

There is a chance that the BlackBerry subscriber base will not stop bleeding. Value investors who buy shares have to accept that risk.

And my own shares? I do believe the company is undervalued, so I’m still holding on. But I’m going to be following today’s meeting for clues about whether I should reconsider.

 
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