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BlackBerry picking
Shares of Research in Motion have soured on legal concerns but the stock looks ripe to buy.
November 23, 2005: 9:26 AM EST
By Paul R. La Monica, senior writer

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Sour BlackBerries: Shares of Research in Motion have sunk this yerar due to legal concerns.
Sour BlackBerries: Shares of Research in Motion have sunk this yerar due to legal concerns.

NEW YORK ( If you own a BlackBerry, the mere thought of no longer being able to use it to check e-mail probably sends shivers down your spine.

The popular device, made by Research in Motion, is said to be so addictive that some call it "CrackBerry."

But at some point during the next week or so, a U.S. district judge in Virginia is likely to rule on a long-standing patent-infringement case between RIM and NTP, a privately held company.

If RIM loses, it faces an injunction and it could be forced to stop selling the BlackBerry in the United States.

This doomsday scenario is not just frightening BlackBerry users. Shares of Research in Motion (Research) have plunged about 20 percent this year.

But though the threat of an injunction is certainly something to be scared of, most analysts think fears are overblown.

Injunction junction, what's your function?

To find out why, we first need a quick recap of the feud.

In 2001, NTP, a patent holding company, filed a suit against RIM in a federal district court in Virginia, claiming that the BlackBerry infringed on its patents.

In 2002, a jury found in favor of NTP and awarded the company $23.1 million in damages.

In 2003, a district judge increased the damages to $210 million and issued an injunction against RIM. That injunction was stayed, however, pending appeal.

Last December, an appeals court sided with the district court and, in March, RIM settled with NTP for $450 million.

But during the summer, RIM walked away from that deal for reasons that have yet to be disclosed, which leads us to the current situation. The district judge in Virginia will rule on whether the terms of the March settlement are valid. He said earlier this month that he wanted to wrap up the case "swiftly," leading to speculation that a ruling is imminent.

If the judge rules that it was not a valid settlement then he could, in theory, reissue the injunction.

However, several analysts doubt that RIM will have to stop selling BlackBerries anytime soon -- if ever.

James Faucette, an analyst with Pacific Crest Securities, points out that NTP has asked the court to make sure that any shutdown of the BlackBerry does not affect government customers or emergency response personnel. And RIM has said that it would be difficult to shut down the service selectively, making it less likely that an injunction could be enforced in a timely fashion, Faucette said.

In addition, NTP is probably most interested in settling quickly. After all, NTP is a holding company and not a rival making its own wireless products. So this isn't about competition.

"NTP only wins if they get paid out," said Barry Richards, an analyst with Paradigm Capital, a Toronto-based investment bank. "They don't win if RIM goes to zero. NTP is looking for money, plain and simple. And RIM has a lot of cash."

As a result, the true worst-case scenario most likely isn't that RIM will be prevented from doing business in its biggest market. Rather, it's that the Canada-based company will have to pony up more loonies to forge a new settlement with NTP.

In a recent research report, Caris & Co. analyst Susan Kalla said a new settlement would probably cost RIM about $700 million. Benjamin Bollin, an analyst with FTN Midwest Securities, thinks RIM might have to pay more but doubted the price tag would top $1 billion. That's a steep price, to be sure, but analysts don't think that RIM will be crippled by such a settlement since it has about $1.2 billion in cash on its balance sheet.

With all this in mind, Bollin said investors are overreacting to the NTP litigation concerns. He thinks that since there should soon be a resolution of the case, investors will be able to finally move on and focus instead on the company's strong fundamentals.

Sweet-tasting growth prospects

Richards points out that RIM should be able to post extremely strong results in its next two quarters thanks to strong holiday sales. What's more, RIM has two new products coming out in conjunction with leading U.S. wireless companies, the BlackBerry 8700 for Cingular and BlackBerry 7130 for Verizon Wireless.

The stock took a tumble on Wednesday morning though when the company said that slight delays in the launch of these two products would cause subscriber additions for the third quarter and fourth quarter to be a bit lower than expected. RIM reaffirmed its sales outlook for the third and fourth quarters, however.

As such, analysts expect RIM to post earnings increases of 25 percent in this fiscal year, which ends in February, and 40 percent in its next fiscal year. Despite this strong growth, RIM's stock trades at just 18 times next year's earnings estimates.

Bollin said a multiple of 25 or 26 times next year's profit projections is a fairer valuation. At that level, RIM would be trading at about $95, nearly 50 percent higher than its current price.

Of course, there are other risks. RIM is coming under increased competitive pressure from the likes of Nokia (Research), Microsoft (Research) and Ericsson (Research).

Nokia in particular is stepping up its efforts in wireless messaging, announcing the acquisition of wireless data and e-mail synchronization software company Intellisync (Research) last week.

Nonetheless, RIM has been in the crosshairs of Nokia, Motorola (Research), Palm (Research) and others for nearly a decade now and despite that, it has been able to keep growing thanks to its loyal group of users. So investors should not fret too much.

"We're not seeing increased competition having an effect on the current pace of business," said Faucette. "It will be more viable by the second half of next year but that being said, RIM is in a strong competitive position."

For more about personal technology, click here.

For a look at more poorly performing tech stocks, click here.

Paradigm's Richards owns shares of RIM but his firm has no banking ties to the company. Other analysts quoted in this story do not own shares of the company and their firms have not done investment banking for RIM.

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Written by: Paul R. La Monica
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