Buy, Sell or Hold: Research in Motion Poised to Snag More Market Share

Research in Motion Ltd. (RIMM) - maker of the ubiquitous BlackBerry - is likely to consolidate and increase its market share.

Almost all of our "Buy, Sell or Hold" recommended stocks started out on the right foot here in the New Year. And our strategy of building up a position gradually up to year-end - to avoid the downward pressure of tax-loss selling, and other volatility - seems to have worked. This has left some cash on the sidelines to take advantage of any sell-offs that are sure to come in the first quarter.

In this environment, plagued with uncertainties, we are going to focus on companies that have bulletproof balance sheets (meaning they require no outside financing), enjoy a sustainable competitive advantage and regularly record high profit margins, and execute their strategies well.

The Waterloo, Ontario-based Research in Motion meets all of these requirements and pops up in our quantitative and qualitative screens prominently. And it helps a lot to have seen this Canadian company handily beat its third-quarter results.

RIMM has a solid, highly defensible franchise in its core market, the enterprise mobile phone segment. You see, the Blackberry line of smartphones has become the "must-have" gadget of managers in Corporate America. And not just because it’s a cool sign of corporate status - the phones are true productivity enhancers among corporate systems managers.

I called the experts just to verify this. First, I queried a friend who runs systems for a Fortune 50 firm. For obvious reasons, my friend requested anonymity, both individually and for the company.

"If I had to implement a system now, the BlackBerry is the safest choice," my friend explained.

And because the BlackBerry was specifically designed for this audience - a lucrative market segment - the device features many capabilities that just aren’t available in competing products. And if they are available, the features aren’t as well integrated into those rivaling devices.

To further buttress my research, I also called my good friend Brenda Lewis, a principal with the Greenwich, CT-based Transactions Marketing Inc., and a venture manager who has launched many mission-critical wireless businesses and who lives and breathes mobile phones.

Lewis is an independent thinker and isn’t "married" to any particular technology, and she was equally bullish: "RIMM has been innovative - ahead of IT officers’ requirements in security and in their ability to accommodate corporate applications."

And not only did she confirm the technological edge and superior capabilities that the Blackberry platform has over the competition, she went on to elaborate on a market rumor that has been going around for some time - that Microsoft Corp. (MSFT) will buy RIMM.

"The probability of Microsoft acquiring RIMM is exceptionally low," Lewis said.

I am not sure I concur, since the Windows and Blackberry market shares would comprise a very small percentage of the overall market. Earlier in 2008 the market shares were:


Industry researcher Gartner Inc. (IT) predicted that global sales of mobile phones would dip between 1.0% and 4.0% - even with 308 million mobile phones being shipped in the third quarter. Gartner’s forecast was consistent with a forecast by IT researcher IDC. IDC predicted a drop of more than 2% globally, despite a 9.0% sales pickup in smartphones for 2009.

But even in a generally cautious environment for wireless devices, this pickup in smartphone sales bodes well for the rulers of the space: Apple Inc. (AAPL) and Research in Motion. Apple had been outpacing RIMM in sales the quarter before, but RIMM’s launching of three new "must have" Blackberry models should pay some major dividends. The BlackBerry Storm - RIMM’s first touch-screen smartphone - is a direct counterpunch to Apple’s iPhone 3G, which allegedly poses some security risks that become problematic in the corporate environment. And the Storm, together with the BlackBerry Storm 9000 and the BlackBerry Pearl Flip 8220, will probably propel RIMM as the major market share gainer in the market in the current quarter, as evidenced by the success of the Storm on Black Friday.

In fact, with this early success already well underway, RIMM projected a large increase in revenue this quarter, to as much as $3.3 to $3.5 billion. Both Apple and RIMM trail mobile device king Nokia Corp. (NOK) in market share. With its focus on the consumer - and not the corporate - market, Nokia leads the world with a 40% market share in the smartphone market, followed by Apple with 17% and Research in Motion with 15%. So the bottom line for both Apple and RIMM is that they will gain market share from Nokia and other makers in a smartphone market that is growing at a 9.0% annual clip.

Research in Motion is poised to do very well for the follow reasons:

• It’s selling into a market segment that’s continuing to grow at a hefty single-digit pace.
• It is technologically dominant in the big-spending corporate market.
• It stands to boost its market share in both the overall smartphone segment and in the corporate segment.
• It has three new models on the market - BlackBerry Storm, the BlackBerry Storm 9000 and the BlackBerry Pearl Flip 8220 - which should enable it to snag additional market share.

All in all, these factors and others should enable Research in Motion to do well in this quarter, and throughout this year in general - despite the negative developments in the global economy.

RIMM shares bottomed at about $36 on Dec. 3, the day it downgraded its outlook. It has rallied some 20% from that quick bottom and has since been repeatedly testing these levels. At these levels, the stock is already back to the range out of which it started 2007 and proceeded to log in a 250% climb.

Research in Motion shares closed Friday at $41.92, and have traded as high as $148.13 in the past 52 weeks.

So with all the aforementioned competitive advantages, the stock correction that seems to have run its course and a valuation that results in the lowest PEG (Price/Earnings to Earnings Growth Rate) ratio among its comparable peers (Apple, Nokia and Microsoft), RIMM is a compelling buy.

Original post

Comments

[jmac74:]

I'm sorry, but your market analysis for RIMM is clearly niaive - almost all of RIM's growth over the last 18 months has been in the 'mass market' bordering on 'consumer' market, not corporate solutions. In this market, they are a much weaker proposition and will need to compete with the big brands such as Nokia, Samsung and Motorola. While they have great advantages in corporate business, it's very unclear how this will translate into mainstream markets and all the time the competition in the Enterprise space is also hotting up on RIM - the alternatives are pretty sound. Beware.

Jan 06 11:49 AM

[Channon:]

The item that trips up most analysts when comparing AAPL to RIMM, including Mr. Marquez here, is AAPL's whopping cash position. Three months ago, AAPL now had about $27/share in cash; that is now well above $28. When buying a share of AAPL, one is buying that $28 in cash, compared to about $3 when buying a share of RIMM. Want to compare the two companies' P/Es and PEG Ratios? Back out the cash per share from each share price first, since the remainder is what one is truly paying for the future business.

Jan 06 12:20 PM

[Market Folly:]

all fundamental arguments aside, we think its worth tracking institutional money and the movements they make as an aspect of assessing an investment. we track hedge funds on our blog and have noted a ton of different prominent funds moving in and out of RIMM. way too many to list, so just type in 'RIMM' in the search bar on our blog www.marketfolly.com/

Jan 06 02:13 PM

[miclone83:]

RIMM gets most of its money from corporate customers. However, a corporate CFO or CIO can instantly freeze all corporate spending on new cell phones, thus effectively blocking thousands of corporate employees from upgrading to new RIMM products. How many corporations do you think are currently limiting employee spending on new cell phones?

Jan 06 04:03 PM

[jenny:]

RIMM beat there third quarter results and has a pretty stable balance sheet. Blackberry's are designed for the business professional which is indeed a "lucrative market segment." When a company needs this type of service, they aren't going to turn to the iPhone. Blackberry has proven to be a reliable as far as security goes. The storm has a rocky launch, but investors are coming around again -I can see sentiment is becoming more bullish (www.predictwallstreet....) and the price is up 1.5% this morning and has been rising in the past week.

Jan 07 02:22 PM

[Hayweed:]

They handily beat guidance after preannouncing that they would miss the original estimate. That is 3 quarters in a row of missed earnings. The new phones are problematic (Storm), too expnsive (the bold) and sold thru a third tier carrier (the flip). Apple has one phone with two memory sizes. Rimm has about 20 phones and there is the problem. One giant company with people working on one phone as a platform and one smaller company trying to keep 20 phones going.

Jan 07 03:34 PM

[ArtfulDodger:]

I wouldn't bet a cent against Nokia. The Finns grind out new products with high margins, don't bother anyone with much fanfare, and in the end, put their competition on the bench.

Look at their balance sheet, cash flow, and margins. You can have the others after that.

Jan 08 08:20 AM

[.crazylegs..:]

it's always fun to see people talk about how the company did compared to analysts guesstimates. Who cares? I'd rather track absolute performance, and this has been nothing short of exceptional for RIM.

Jan 09 01:36 PM

[User 188158:]

aapl ninjas are blind to downsides and evangelical about upside. Nokia is not going to go away and RIMM is stable, growing and customers are sticky. No converts from RIMM to Apple. What market would you rather invest in during the next 2 years - stable business productivity with locked in customers or consumer gadgets that are fun with spotty email used by fashionistas and coolios.

Jan 25 10:53 AM