The Tycoon Report

Black Eye for the BlackBerry

Ok, people, let me give you a quick scenario. You tell me what you think.

Let’s say you owned a small widget company in your local neighborhood. You’ve been selling these widgets to your neighbors for the last five years and are doing reasonably well. One day you get a knock at your door. It’s an angry man who says, “I invented the widget first.” What do you do? 

Well, first you try to pay him off, and if that doesn't work, you go to court. You go through a long, drawn-out court battle, spend millions on legal fees, but you finally reach a tentative deal with the angry man (to pay him off, of course). And then something goes wrong; somebody doesn’t like every aspect of the deal and the Judge says, “Sorry Widget, Inc., this is unacceptable. 'Go back and work this out.”

Now keep in mind that all the while your business is THRIVING. You’re selling more widgets than you can count -- you’ve actually doubled your customer base in one year! You have a war chest of roughly $2 billion -- you were only talking about settling with the angry man for less than 20% of that!

As a business person, would a minor setback like that have you worried? Keep in mind, you’re still the most popular widget in town. You have a cash base that dwarfs any type of payout you would possibly have to make to the angry man, and you’re still growing by leaps and bounds. So would you close up shop that day?

As a business person I wouldn’t even flinch.

This is also why I didn’t flinch when a judge, last week, ruled against Canada’s Research in Motion (RIMM) -- throwing out its proposed settlement with NTP (patent and discovery organization). Most investors, however, obviously didn’t feel the same way.

Right after the news, there was a sell off, and the stock dropped about 10% ... sometimes the fear in the market really blows my mind. The stock has since recovered because another judge threw out one of the five NTP patents at issue in this whole controversy, but that’s beside the point.

The point is, as intelligent investors, we need to look for opportunities to capitalize on excessive fear or excessive greed in the market. A company like RIM dropping 10% after news like that is definitely EXCESSIVE FEAR! BlackBerry is one of the most well-recognized names in the consumer technology space today. It doubled its subscriber base in 2005 alone -- going from 1.07 million to 2.5 million BlackBerry Wireless subscribers -- and its sales and margins are great.

Now, here’s a company with solid 20% net margins, a 70% five-year growth rate, roughly $2 billion in cash, and a franchise business ... I would be hard pressed to bet against these guys -- regardless of what happens in court. At the end of the day, money talks -- RIM can just as easily raise its offer to NTP and still be in an extremely comfortable cash position. And worst case, RIM can take some of that $2 billion and create a work-around to the patents at issue. This is just software -- little 1’s and 0’s -- and software can always be rewritten.

The stock is down from $80 to $65 in less than 3 months -- and it has a PE of 36 -- which isn’t a bargain basement price. But with its current growth rate showing no signs of letting up, I feel extremely bullish on the stock.

Especially after this past week.

I think a lot of the bad news has already been factored into the stock, and so the downside here is minimal. As a business person and as an investor, I would definitely be comfortable making RIMM a long term position in my personal portfolio.

So until next week folks ...