Seeking Alpha
Profile| Send Message| ()  

Research in Motion (RIMM) pulled the entire Telecom industry higher yesterday making it the most sought after telecom stock. The industry en bloc remained unchanged. By the end of the day, Research in Motion had already risen $1.64 (13.8%) to $13.56 supported by heavy volumes on the back of Friday's 14% rally, signaling a steady increase in investors' expectations. A staggering 110.6 million shares of RIM exchanged hands in comparison to its average daily volume of 36 million shares.

Some attribute the meteoric rise to the anticipated unveiling of BlackBerry (BB) 10 platform in the second half of January, and suppose that it will turn around the company's fortunes for good. The expectation is that BB10 platform will propel RIM to the coveted third place in the smartphone market, as Apple (AAPL) and Samsung (SSNLF.PK) have steered clear of the rest of the competition.

Investment Rationale

  • Support from Major carriers

Major carriers in the U.S have thrown their weight behind the BlackBerry 10. This was evident when Sprint Nextel Corporation (NYSE:S), showed its support for the BlackBerry 10 at the Las Vegas Consumer Electronics Show.

  • Rapid Apps development

RIM recently organized two events for app developers. As a result of these events, the BlackBerry 10 added 15,000 apps in just two days.

  • Above average growth rate

Consensus estimates of EPS growth rates for the next 5 years are expected to be 15%, compared to the industry average of 9%.

  • Low valuations

RIM is currently trading at a price to sales (P/S) of 0.62, compared to the industry average of 0.95. The price to book value (P/B) is also considerably lower at 0.82, when the industry average is 1.96.

Strengths

Their key strength has always been the near constant 79 million subscribers, who have been very loyal to their blackberries.

Investment Risks

  • RIM is hoping to capture its previous BlackBerry market, by wooing them onto the new BB10 platform, but the vast majority of them may have already switched to iOS or Android devices, during 2012.
  • Earnings per share (EPS) experienced a decline of -64.95% in 2012.
  • Apart from its app developer's event, BB10 is not a center of attraction in the industry, as the majority of developers are focusing on Windows Phone 8 platform.
  • As of Q3 2012, Android had 75% of the market share, and the Apple iPhone remains a pristine competitor.
  • BB10 has been so hyped and the premium has been built into the stock price that if it doesn't meet expectations, it may send the stock into another tumble similar to its 25% plummet post the previous earnings report.
  • Even the most optimistic estimates show that RIM will continue to make losses in 2013, and well into 2014.
  • Zero dividend.

Competitive Environment

Some of the direct competitors to RIM are Apple and Google (GOOG). Both the companies are relatively bigger in size with revenues topping $156 billion for Apple and $47 billion for Google. Both the companies have an operating margin of upwards of 30% compared to -3% for RIM. They also trade at a much higher P/S of 3 for Apple and 5 for Google compared to 0.61 for RIM, which is mainly due to the highly positive investor expectations from Apple and Google.

Recommendation

Analysts aren't sure which news is driving RIM shares higher as it is commonplace to keep finding negative reports of malfunctioning software, connectivity issues for current BlackBerry users and decline in sales.

Out of 43 analysts following RIM, 18 have recommended UNDERPERFORM or SELL, while 22 recommend HOLD, leaving no doubt in the investor's mind regarding the direction the stock is headed.

The recent surge can be used by existing investors to exit the stock, and for others to go short on RIM in the short term.

Source: Will The BlackBerry 10 Bring RIM Back To Life?