RIM Takes Further Pounding as Doubts on Patent Portfolio’s Value Surface

Research in Motion’s (NASDAQ:RIMM) stock has slumped almost 30% in the last week as bad news continues to emerge for the embattled manufacturer. The company disappointed in its earnings announcement last week leading investors to punish its stock by 20%, see our note RIM Blows it with Investors Again, Lowering Estimates. This week the pressure continued as the company’s SEC filings revealed its worsening position in the U.S. market and Jeferries suggested to clients that its wireless patents have a maximum liquidation value of only about $2.5 billion, or $1 billion if it continues to make smartphones. ^[1] Incidentally, Google’s (NASDAQ:GOOG) planned acquisition of Motorola Mobility (NYSE:MMI) for a valuation of $12.5 billion was about 60% above Motorola’s market price, and this premium was justified due to its rich patent portfolio so such a low value on RIM’s portfolio is disappointing.

After the past week’s blood bath, our $26 price estimate for RIM stock is about 20% above market price.

The Growing Importance of a Strong Patent Portfolio

The value of mobile patents have gained enormous attention recently that was started with the auction for Nortel’s patents portfolio, in which Google was outbid by a consortium of Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), RIM, EMC (NYSE:EMC), Sony and Ericsson (see Google Rivals Scoop up Nortel Patents in High Stakes IP Tussle). To make up for this lost opportunity, Google then planned to acquire Motorola Mobility, which had a rich patent portfolio of over 17,000 granted patents and approximately 7,500 pending patent applications (see Google Pays a Princely Premium for Motorola’s Patents). Now large tech companies view patents as a defensive tool to keep competitors at bay.

Microsoft is making use of its portfolio by going after phone manufacturers using Google’s Android and striking licensing deals for alleged patent infringement in these phones. Ironically, the company is earning much more on Android than it earns from its own mobile operating system. See Android is 3x More Valuable to Microsoft than Windows Phone 7.

For RIM, the patent argument has drummed up some interest. Earlier this month, activist shareholder Jaguar Financial Corp. urged RIM to consider a sale of the company or a sale of RIM’s patents in order to maximize shareholder value (see RIM Rallies as Activist Investor and Upgrades Bring Life to Stock). However, we outlined in a subsequent note called Why RIM Makes a Poor Acquisition Target where we discussed that RIM’s patent portfolio isn’t worth the hype. This view seems to underline the Jeffries note and is sinking in with investors.

See our complete analysis for RIM stock here

1. RIM Patent Sale Would Reap Little, New York Times quoting Jefferies as the source, September 21st, 2011 [↩]