Apple (NASDAQ:AAPL) and Samsung (PINK:SSNLF) may have run away with the smartphone market so far, but 2013 could well mark a turning point in the industry’s future. After failing to anticipate the meteoric rise of smartphones and spending months languishing in the ever-growing shadow of the two smartphone giants, rivals and erstwhile market leaders, Research in Motion (NASDAQ:RIMM) and Nokia (NYSE:NOK), seem to have finally gotten their act straight. While Nokia has already transitioned to the Windows Phone 8 platform and is seeing some initial success with the recently launched Lumias, RIM has placed all its hopes on the new BB10 platform which will be launched towards the end of January. It may be foolish to suggest that either Nokia or RIM could make big market share inroads against the smartphone giants any time soon, but 2013 could very well be the first time in a long while that both will finally have a competitive presence in the smartphone market.
It is in anticipation of such a turnaround that RIM has seen its stock rise by over 50% in the last two months. Ever since RIM announced the launch date of the first BB10 devices, investor enthusiasm has grown in leaps and bounds, dimmed only to an extent by a set of disappointing third quarter results RIM announced last month. As BB10 release nears, RIM’s stock is trading at $12 levels, which we believe is fair value for the company’s stock at the current stage. We see most of this value coming from RIM’s huge subscriber base and the unique value propositions it can make in push email and security. An upside/downside to our price estimate completely hinges on the kind of success and market share gains that BB10 sees in the coming months.
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80M Subscriber base provides value
The struggling smartphone maker has seen its BlackBerry unit sales fall year-over-year for the last six consecutive quarters. Last quarter saw RIM ship only 6.9 million BlackBerries, a precipitous drop of more than 50% y-o-y and about 7% q-o-q. While sales in the developed markets of the U.S., Canada and U.K. continue to decline steeply, a sustained popularity of the BBM service in international markets has helped RIM defend its subscriber base quite well. It is on the back of its about 80 million strong subscriber base that RIM has been able to continue generating cash through steady high-margin carrier fees despite reporting net losses for three quarters straight.
Moreover, with BB nowhere near its peaks of customer appeal, RIM will be primarily looking to get this installed base to upgrade to BB10 initially. At the same time, RIM will bank on the push e-mail and BBM service revenues from existing subscribers to tide over this difficult transition period. CEO Thorsten Heins has said the company is looking to leverage the security strength of BlackBerry services that governments and enterprises around the world have come to rely on.
Push Email division key
We believe the BlackBerry services, which include push e-mail and BBM, are unique value propositions for RIM’s customers, and the company is doing the right thing by realigning its focus on this segment as it negotiates the BB10 transition. Our estimates show that this is RIM’s most valuable division currently, accounting for almost 40% of our price estimate for the stock.
But a carrier push to reduce fees as well as a loss of more enterprise customers to rival platforms, as the bring your own device (BYOD) movement becomes more popular, could hinder RIM’s strategic moves to boost revenues from the services division. In addition, the new BB10 devices will not be supported by the existing enterprise servers (BES), potentially making the BES 10 upgrade process costlier and complicated, thereby reducing RIM’s chances of pushing BB10 into the enterprise base. (see BES 10 Fragmentation Increases The Risk For RIM)
A lot depends on BB10’s reception in the market, and RIM faces an increasingly uphill battle against the two well-entrenched mobile ecosystems of the iOS and Android. Even when BB10 releases, it will have to face some serious pricing pressures in the emerging markets where cheap Android smartphones are pushing down prices. Moreover, with BB10 devices to be launched in the first quarter this year, RIM will be subject to greater competitive pressures not only from the iPhone 5 and the slew of Android smartphones being launched but also from the new Windows Phones, which will have had a three-month head-start by the time BB10 launches. The competitive pressure will come not only from potential customers deciding to purchase rival smartphones, but also from developers unwilling to devote their resources to a platform with questionable chances of taking off.
Although we do not expect RIM to ever reach the heights it once commanded in the smartphone market, if RIM does manage to make BB10 a strong smartphone OS, it could still claw its way back into the market and continue to generate cash from its enterprise and retail niche. In this quest, the emerging markets of Asia Pacific, South Africa, Venezuela and Indonesia, where the BB brand has not yet been hit as badly as in the developed markets, could be RIM’s dark horse.