My mind is just going crazy with this rumor. Here are some somewhat random thoughts on the subject ...
(1) Maybe this is a negotiating ploy. Maybe Verizon and Motorola are at a stalemate and one just said, "Well, we'll just cancel the device altogether", to try and force the other's hand. For instance, I could see Verizon saying that they want 1GB of RAM versus the 512MB, and Motorola's not budging on it. So, Verizon says they'll just cancel the device to try and force Motorola to cave.
(2) If it's being replaced by the Targa, why? From everything that I've seen, the Targa and Bionic will have similar hardware specs, with the exception of the rumor that the Targa might have a quad-core CPU (although a late year/early next year release to go along with it). So, in a sense, they are similar devices except for the form factor. Is that enough to cancel one device in favor of another?
(3) Also, if there are hardware and/or software issues with the Bionic which have caused the cancellation, why are they not also with the Targa due to the supposed hardware similarities? From what I've seen the Targa will be dual or quad-core, qHD 4.3-in display, 4G LTE, much the same as the Bionic.
It seems the story is growing legs though. PhoneDog has posted the story to go along with Phandroid and HoFo.