REUTERS/Olivia Harris
It's not a resounding endorsement by any means, but the analyst who warned of the collapse of Research In Motion Ltd.'s share price long before the market saw it now says that the stock has become too cheap to bet against.
Pierre Ferragu of Sanford C. Bernstein & Co. LLC told clients on Tuesday that the shares have fallen so low that shareholder activism could force a change in management, or a competitor could launch a takeover bid. Either would be a catalyst for the share price.
Mr. Ferragu's change of heart is notable because he has been one of the company's most prescient – and biting – critics. While he's not suggesting investors buy the stock, he is cautioning against assumptions that there is further downside.
The precipitous decline in RIM's share price this year has followed an alarming decline in the company's market share, especially in North America. Google Inc.'s Android mobile platform accounted for 52.5 per cent of all global smartphone sales last quarter. Apple Inc.'s share was 15 per cent and RIM's slice amounted to just 11 per cent, according to the research firm Gartner Inc.
RIM's value has plunged 70 per cent year to date, meaning investors value the company at only about $120 (U.S.) per user, compared with a valuation for Taiwan-based HTC Corp. of about $260 per user. At that valuation, rivals such as Microsoft Corp. or HTC might be tempted to acquire RIM to beef up their own mobile client base, Mr. Ferragu noted.
Microsoft, for example, could potentially quintuple the number of people using its Windows 7 mobile platform by spending a few hundred dollars per user to switch BlackBerry users over to new, replacement Windows devices, he suggested.
To give another sense of just how cheaply RIM shares trade today, investors value the company at less than three times the annual cash stream that comes from the service fees it charges for handling BlackBerry traffic. A buyer paying a 50-per-cent premium for RIM would be able to repay 62 per cent of its investment in three years, just by tapping the monthly service fee RIM charges customers, according to Mr. Ferragu.
"This presents, without a doubt, a strong valuation support for any activist investor or trade buyer. Today's valuation ... prices in a collapse of devices sales that is far worse than our already pessimistic forecast," he wrote in a research report.
The Sanford C. Bernstein upgrade on RIM follows three others over the past two weeks. Goldman Sachs Group Inc. raised the shares to a "neutral" rating, while Northern Securities and Brigantine Advisors put "buy" recommendations on the shares. "We expect RIM to continue to suffer the agony of the steep valuation discount, but incremental improvement in device sales could instigate bottom-dweller interest," Brigantine analyst Kevin Dede wrote in note published Nov. 17.
Mr. Ferragu now rates RIM shares "market-perform" and gives them a price target of $16, down from $20 previously. He says investors should avoid the stock until there are "credible signs" that change is coming, which at this point remains unlikely. A further slide in market share continues to be a risk, as does rising inventory, which could lead to major writeoffs. At the same time, taking a short position in the shares has become too risky given the exceptionally low valuation, he warns.
The London-based analyst warned investors more than 18 months ago that the "first cracks" had appeared in RIM's model as a premium handset company. While RIM has managed to continue to deliver growth, the average selling price of its devices has kept falling. He estimates that gross margins fell to 22 per cent last quarter from 33 per cent the previous quarter.
"The window of opportunity for RIM to fix its product portfolio is mostly likely gone," Mr. Ferragu concludes.
Recognizing that customers are opting for rival devices, RIM announced on Tuesday that it will upgrade its server technology, which governments and businesses use to secure sensitive data, to manage not just BlackBerry devices, but also Apple Inc. and Android products. Called BlackBerry Mobile Fusion, the technology should be on the market by March, RIM said.