A Brutal Warning to Tech Firms and Investors
LONDON -- Just more than five years ago, on June 29, 2007, the first iPhones went on sale in the U.S.
The incredible success of this touchscreen smartphone helped catapult Apple (NAS: AAPL) to become the world's largest technology business by market value. Last night, Apple shares closed at more than $599, valuing the iconic firm above $560 billion.
Apple ruins RIM
In what Austrian-American economist Joseph Schumpeter called the "creative destruction" of capitalism, one company's triumph is often another company's ruin. This certainly seems to describe the fate of Canadian tech business Research in Motion (NAS: RIMM) . Indeed, in the evolutionary race that is the technology industry, RIM has gone from fast-moving mammal to lumbering dinosaur.
After the iPhone launched, RIM's billionaire CEO, Jim Balsillie, said in November 2007:
As nice as the Apple iPhone is, it poses a real challenge to its users. Try typing a web key on a touchscreen on an Apple iPhone, that's a real challenge. You cannot see what you type.
How disastrously wrong Balsillie was. After a slow start to sales, iPhones started flying off the shelves, with sales soaring past 37 million units in the final quarter of 2011 and more than 35 million in the first quarter of this year.
When RIM ruled the world
Back in the halcyon days before Apple ate RIM's lunch, the BlackBerry was the king of the smartphones. With its full QWERTY keyboard, the device became so popular -- even addictive -- among business folk that it acquired the nickname "the CrackBerry."
The first BlackBerry device was launched in 1999 in Germany, with RIM's first BlackBerry smartphone following in 2003. Its immediate success led RIM to launch a string of better BlackBerry models and improved operating systems, with the BlackBerry Curve 9320 unit one of its latest models.
However, in recent years, RIM has fallen by the wayside, losing its leadership in the smartphone market. Its reputation also took a dent in October 2011, thanks to a four-day outage during which users were unable to connect to BlackBerry servers.
More recently, RIM has repeatedly delayed the launch of its next-generation, keyboard-free BlackBerry 10 handset, which is now due in the first quarter of 2013. This news has spooked investors already worried by the 85% market share Apple and Google Android devices have over smartphones.
Before Apple, Samsung, and Nokia charged past it, RIM was a force to be reckoned with. At its peak, RIM's share price closed at $147.55 on June 19, 2008. How the mighty have fallen in the past four years. On Tuesday, RIM shares closed at $7.35, just above its 52-week low of $7.14 and down a crippling 95% from its peak. RIM shares crashed by almost 75% in 2011 and have nearly halved (down 49%) so far this year. Last month, RIM's share price fell by more than 30%, taking its shares to levels last seen in 2003.
At RIM's current price, the entire business is valued at a mere $3.8 billion, versus its peak of $84 billion. The latest slump came on Friday, following dismal sales and earnings in the company's latest quarterly results. Alas, in the first quarter of its 2013 financial year, RIM lost $518 million on sales, down by 43% to $2.8 billion. In the same quarter of fiscal 2012, RIM made a profit of $695 million on sales of $4.9 billion.
Right now, RIM investors must be desperately pinning their hopes on the launch of BB10, because its handset and tablet sales are plunging, putting the company's very existence in doubt.
What you get for $7.35
The No. 1 question I always ask before investing in a company is: Are its earnings sustainable? If not, then the shares are not for me.
Then again, despites its declining sales and mounting losses, there is considerable asset value in RIM's shares. In fact, $7.35 for one share buys you a slice of a company that:
- has $2.2 billion in cash, which is nearly 58% of RIM's market cap;
- generated $710 million of operating cash flow in its first quarter;
- has 78 million BlackBerry customers in 175 countries, including 58 million users of BlackBerry Messenger;
- sold 7.8 million BlackBerry smartphones in its latest quarter;
- owns a portfolio of more than 11,000 patents; and
- trades on a price-to-sales ratio of a mere 0.3.
Clearly, RIM has some attractive assets. But sales are falling out the sky, its cash pile is being gobbled up by rising losses, and users may lose patience while waiting for BB10 and leave for competitors.
Also, with chief executive Thorsten Heins only in the job since January, it remains to be seen whether his strategic review can successfully turn RIM around. Nomura Equity Research has warned that RIM will be end up bankrupt if Heins can't turn this tanker around in time.
If Heins can work wonders, then perhaps RIM will "pull an Apple." In the dark days of 1996 and 1997, Apple was worth less than its $2 billion cash pile, but it bounced back to become a global powerhouse. Today, with RIM competing against the awe-inspiring Apple, such a Lazarus-like comeback seems highly unlikely.
Lessons to learn
There is a clear lesson here for managers and investors in technology businesses: If a company fails to seize onto a strongly emerging trend, then it can be left far behind when the tide goes out. In the high-tech world, being late to the party usually means losing a seat at the big table.
What's more, a business can go from being No. 1 in its field to being an also-ran, overtaken by smarter, faster rivals. Today's move toward BYOD -- "Bring Your Own Device" -- has favored iPhones and Android handsets and relegated BlackBerrys into third place.
For RIM to survive, Heins may have to break up or sell the business -- perhaps to Microsoft or a private-equity firm -- in order to realize any remaining value. Nevertheless, he must move quickly, before RIM's financial weaknesses overwhelm the company.
In the short term, things are likely to get worse for RIM before they get better, so I would avoid the shares until they become a blowout bargain at, say, $5 or less.
Finally, I'm wary of paying high prices for go-go tech shares, as is billionaire investor Warren Buffett. The Oracle of Omaha prefers "boring," high-quality businesses with predictable earnings and commanding market shares. To find out which FTSE 100 firm Buffett aggressively bought into earlier this year, simply download your free copy of our latest report: "The One UK Share That Warren Buffett Loves."
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At the time this article was published Cliff does not own any of the shares mentioned in this article. The Motley Fool owns shares of Microsoft. The Fool owns shares of Apple. The Fool owns shares of Google.Motley Fool newsletter serviceshave recommended buying shares of Apple, Google, and Microsoft.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Microsoft.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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