Apple (and RIM) stock revisited, part 2

In an earlier post, I made the argument that Apple was not necessarily undervalued.  Since market valuation is by nature a relative concept, I would also like to make the argument that Research in Motion (RIMM) is most likely undervalued.

Since I wrote my first post on Apple, a few things happened.  One of them was that a power surge caused by a particularly strong storm destroyed my 2006 iMac.  Why was my computer plugged into the wall socket rather than into my surge protected outlet?… So I bought a new iMac, and it really is a thing of beauty, it works great and it couldn’t be easier to set up, for the most part.

 

As I wanted to retrieve some of the data from my original iMac and had bungled my first attempt, I called Apple’s hot line; their specialist couldn’t have been more helpful.  I also wanted to synchronize my iPod, and there, things got messier.  One staff at the Apple store told me that I could do that.  But when I called Apple’s hot line again, the new specialist declined to help, suggesting that I bring my new iMac, the hard disk drive of my old iMac and my iPod, all thirty pounds of them, to an Apple store for further assistance.  I was not happy.

The change of computer also necessitated the transfer of some Adobe programs which required the de-authorization of my previous iMac.  The Adobe customer support person was efficient and told me that I would receive by email a link to rate his service.  I did, but I was very surprised to see that the questionnaire also asked about my satisfaction with similar support service from Apple.  Clearly, the questionnaire was not tailor-made for me, but it made me wonder: besides its ongoing Flash Player saga, did Adobe know something I didn’t about Apple customer service?

The second thing that happened was when my wife suggested that I upgrade my iPad to IOS6 as she had just done.  Aware of the Apple switch to proprietary map software, I asked her if she still had Google Maps, which she confirmed.  Yet much to my annoyance, when I rebooted my iPad, both Google Maps and Youtube aps were gone!  At no point in the upgrading process had I been forewarned that I would lose these two aps, and the new mapping ap, too cleverly in my opinion, had a similar icon to that of Google, except that, underneath, it said “Maps” rather than “Google Maps”.  My wife had been fooled and so, I suspect, many other users.  The iPad allows you to “restore” an earlier version of its software, except that restoring will not get rid of IOS6 and therefore will not get your Google Maps and Youtube back.

Today, much was made of the Apple CEO’s apology for installing a poorly performing mapping application.  In my view, he should have apologized for not giving his customers an informed choice of upgrading or not.  In this instance, a company that prided itself on being customer focused, sacrificed its customers to its ongoing battle with Google.  Which brings the question, aesthetics apart, if Apple justifies its premium pricing on providing a premium experience, what happens when this experience (technical assistance or software upgrade) starts to falter?

The final thing was the release of the latest RIMM quarterly results.  Much has been commented already.  Suffice to say that the loss (ex-goodwill impairment) was lower than expected, cash holdings were slightly increased despite selling devices at a loss (thanks to cost cutting and a reduction in working capital due to business shrinking), sales fell sharply from a year ago but the subscriber base increased at an annualized rate of 10% quarter-over-quarter.

Earlier this week, RIMM’s management disclosed some of the features of its upcoming Blackberry 10.  Even to a non-geek like me, the upcoming RIMM smart phone looked sleek and well thought out.  Will it have many meaningful applications?  Will it have something comparable to Skype or Apple’s Facetime?  I don’t know.  A keyboard and a touch screen versions are set for release during the first quarter of next year.

At the time of this writing, RIMM has no debt and a market value of US$3.9 billion.  Net of cash, its enterprise (or business) value is US$1.6 billion.  This works out to US$20.4 per customer.  In other words, the company is priced as if it were going bankrupt.

Yet, it looks like the company has the financial resources to produce the BB10.  It also looks like it will have the resources to market it, as it will receive financial support from carriers that are anxious to reduce Apple’s negotiating leverage and interested in having a wider smart phone offering.  It is true that RIMM runs far behind Apple and Android-powered phones and that it is unlikely to catch them any time soon, if ever.  But it does have strengths, apart from his new technology: a secure network, a hardcore customer base, and excellence in text messaging.

We already have a “going out of business” value estimate for RIMM: US$1.6 billion.

What if it makes it?  That is very difficult to estimate, in part because RIMM has already announced that it will strike alliances and licensing agreements with third parties which will share the downside as well as the upside of the BB10 and beyond.

If we look at Apple, we can make some very rough estimates: its revenue per iPhone is about US$660, its gross margin US$ 430 and its net profit after-tax US$270.  Using a p/e multiple of 13, each one million iPhone sold would have a market value of US$3.5 billion.  Analysts expect that it will sell over 160 million units in 2013.

RIMM is not the market leader that Apple is, its new BB10 may be priced lower than the iPhone 5, its leverage with sub-contractors is much weaker, and as we already pointed out, it has decided to share some of its upside.  So for argument’s sake we will assume that its normalized net profit/BB10 unit will be US$150; using an arbitrary p/e multiple of 11 and assuming that RIMM sells 10 million new phones a year, its market value would then be US$16.5 billion (I assume that all excess cash balances will have been consumed to ramp up the business).

 

Which will it be?  Probably neither of the above, but somewhere in between.  The key decision though is whether RIMM will make it or whether it will bomb. 

I think that it will make it.  I also fear that Apple may be starting to suffer from the kind of hubris which stellar performers almost inevitably fall into, sooner or later.  Putting it all together, I see more upside with RIMM than with Apple, even considering the very steep challenges that the former is facing.

I am long RIMM and have no position in Apple.