Research in Motion: Contrarian Investment or Trap?

Here's a recent Barron's article on Research in Motion (RIMM) and its troubles.

Research in Motion clearly exists within a very difficult to understand competitive landscape, the rapidly changing smartphone world, but eventually what seems like a low price relative to prospects makes something like this interesting.

It's certainly not the kind of wide moat business in a stable industry that I usually like to invest in. I won't buy it. Yet, it seems at current valuations not much has to go right for RIM. Even at profit growth much lower rates than those suggested in the Barron's article, if RIM continues to get cheaper, it's worth keeping an eye on*.

The extremely low valuations across the large cap tech landscape was hard to imagine a decade ago. As technology companies, each has real competitive threats (some more than others) and other short-to-intermediate term difficulties. Yet, it's hard to understand why basically all of them (Apple: AAPL, Google: GOOG, Intel: INTC, Dell: DELL, Hewlett Packard: HPQ, and Microsoft: MSFT, Cisco: CSCO) seem to be selling at more or less a discount to a conservative estimate of intrinsic value.

Apple and Google sell at enterprise value (enterprise value = market cap - net cash) to earnings in the mid to low teens while the rest sell at single digit multiples.

Each of these businesses generates more than a respectable return on capital. It's the durability of those economics that is always a difficult question to answer with tech companies. That's why, unless there is a huge discount to intrinsic value, it's preferable to avoid them.

Having said that, I could buy the idea that one or two of them are going to get into trouble but...all of them? It's tough to come up with a plausible scenario where that happens. The basic arithmetic of these valuations does not seem to make sense given likely future outcomes. A business selling at a single digit multiple can generate healthy returns for owners even with no growth prospects if the CEO is a good steward of capital. Still, as I said in this previous post, if the external threats are financially catastrophic (ie. most newspapers in recent years) then almost no price to earnings multiple is low enough.

The current situation appears to be the exact opposite of a decade ago where people were paying nonsensical valuations for wildly optimistic future expectations.


* No position in RIM. For me to buy it I'd need a bigger margin of safety than the other tech stocks mentioned above. The reason for this is I don't yet have a good feel for the risks to what appears to be a relatively narrow economic moat. It's just that, given how cheap it has become, I'm going to start paying attention to it for the first time and try to gain a better understanding of RIM's business. For now, I remain uncomfortable with RIM's competitive threats.

I do have long positions in the other tech stocks mentioned above though each is small in size relative to the portfolio. The reason they are not larger positions? Because, in general, technology businesses reside within fast changing, unpredictable competitive landscapes. It's just that these businesses over the past couple of years sold at price levels in the market that provided a very large margin of safety in my view. So until the margin of safety shrinks I'm willing to have some limited exposure. Unlike shares in some of my favorite businesses (ie. those in Stocks to Watch bought at the right price) these tech stocks are mostly NOT long-term investments.
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Research in Motion: Contrarian Investment or Trap?
Research in Motion: Contrarian Investment or Trap?
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