Research in Motion: Valuation Wall Street Cannot Deny

Analysts on Wall Street have turned bullish on Research in Motion (RIMM) since the beginning of October, most of them noting that the maker of Blackberry is simply too cheap. Shares of RIM dropped sharply after the company reported their second quarter results that were just a little bit light in terms of revenue. We wrote a blog on the topic that day, RIMM: Reports of Sales Death Are Greatly Exaggerated. The stock fell nearly 20% after the report, which we view as an opportunity for value investors.

It would appear that analysts on Wall Street agree, as the community has become much more bullish on Research in Motion over the last week. The stock was upgraded to Buy on the 5th of October by Needham. Two analysts initiated coverage at Buy ratings just two days later. Another upgrade to Buy came later in the week from R.W. Baird. Among all of this positive sentiment, there was one analyst going against the grain. Coverage was initiated at Bernstein and the analyst there believes RIMM will Underperform. Overall, the analysts are bullish on the stock and the median price target among the more than 40 analysts covering the stock is $90.

At Ockham, we have to agree that Research in Motion is quite attractive at the current price levels. The market and some analysts took a very pessimistic view of the earnings release, but having the time to digest the numbers the Street has come around; although, even the positive sentiment among analysts has not moved the stock higher. RIM is still growing rapidly, albeit not at the same breakneck pace of yesteryear. For example, RIM should see revenue growth of about 35% this fiscal year and that growth will be in the high teens in FY 2011. The company is trading for 13.8x fiscal 2011 earnings, which is far more compelling than competitors like Apple (AAPL) trading for 27x 2011 earnings, Motorola (MOT) selling for 30x next year’s earnings, and Palm (PALM) which trades for 40x expected earnings one year ahead.

We are maintaining our Undervalued rating on these shares, and we think a price of $94 would more accurately reward the company’s extremely strong fundamentals. There is growing competition in the smart phone space, but with global smartphone shipments growing rapidly (about 27% in the second quarter) we think RIM’s market share should be attractive. The CEO discussed his “land grab” strategy in the conference call as a reason why they have lowered prices on many of their models. We think that this strategy will benefit the company over the long term, and should help shield it from some of the industry upstarts. This situation represents an opportunity; the analysts are starting to understand, but the market as a whole has lagged.

Original post

Comments

[Shishir Nigam:]

Agreed, the massive drop after the quarterly results was quite the over-reaction. RIMM has been able to hold up its market share reasonably well in the face of competition from numerous entrants in the smart phone market. The Blackberry's own App Store is helping in its rebuttal to the iPhone as well.

It was just unreasonable for analysts to be expecting RIMM to maintain the large margins that they have enjoyed in the past.

For more analysis, check out my blog: youngandinvested.com

Oct 12 04:52 PM

[Real Dave:]

Cramer increased his price target for Apple to $264/ sh due to an accounting change that allows the software portion of their technology to be counted in their earnings. If this is true, shouldn't this change also increase blackberry's overall target?

Oct 12 10:06 PM

[Hayweed:]

It amazes me how people do not understand that Apple reports earnings in GAAP and nonGAAP. The nonGAAP earnings is the full impact of the iPhone on earnings while GAAP is where iPhone sales are deferred over two years.

Apple's nonGaap earnings for the past 12 months is $9.23 per share which gives Apple a nonGaap PE of 20. Since Apple is growing faster than Rimm and has over $30 a share in cash comparing the Gaap PE to Rimm's PE is wrong.

The accounting rule change means that Apple no longer has to defer the iPhone revenues over 2 years thus Apple will most likely report close to $10 a share in earnings this year thus a PE of 19. If Apple which is on fire gets a PE of 19 it is too low or Rimm's is way too high. Thus long Apple and short Rimm is a great pair trade.

Oct 12 11:41 PM

[JamesApple:]

Using Sun Tzi's Art of War, 'There are a hundred reasons for failures but only one for success'. Rim is pulling all its stops and pretty up all its numbers trying to sucker in the investors to buy the failing Rim.

Rim is sold at more than 170 countries, any drop in sales of blackberrys translate into millions of units unsold resulting in multi-millions loss of dollars in sales, that is the problem with selling in so many channels spread out in so many countries, Rim MUST have a very high volume in sales in order to prevent drops in profit, but in the middle of the worst recession in 60 years, some call it a depression already, Rim's chance of escaping a double digit drop in sales this Christmas is higher than not snowing in Christmas. I think a 23% drop in blackberry sales this Christmas is highly likely. This Christmas appears to be an all-Apple Christmas, it is also the reason why Verizon is soliciting the help of Motorola and HTC Android heavily in hopes of salvaging its all-important Christmas season because the Buy1 Get1 Free blackberry is simply not selling for the past 4 months, people are simply tired of blackberrys which had long been perceived as cheap junky giveaways,

Look around, people who are hardcore texting addicts are using HTC, LG, Motorola, Nokia, NOT blackberries. People who are hardcore internet surfers use Apple, period. This leaves blackberrys out in the cold, to be frost bitten this winter and beyond. The big CAP players know that, that's why the big cap players dumped their Rim stocks in September leaving the stock down 22%. The other Rim investors had been steadily selling Rim stocks trying to salvage as much value as they can. Rim is now a sinking Titanic and there is no way the analysts can raise the Titanic from sinking all the way into chapter 11 soon.

Rim has nothing new to sell, while everybody else is coming out with Android, webOS, iPhone OS, or other modern technologies directly addressing the needs of people, why would people want to buy old junky blackberrys even when they are being repackaged and released under new skin?

Oct 13 12:05 AM

[JamesApple:]

People are never kind to losers. Rim's loss of market shares to Apple will only snowball ending in total Apple dominance of the smartphone space and Rim's demise and subsequent bankruptcy.

Oct 13 12:30 AM

[ray b:]

images.google.com/imgr...

Oct 13 08:27 AM

[Wireless Wiz:]

This guy should be renamed Waste Management given all the garbage that comes from him. Ok, James we get it, you hate RIM. Move along and post something useful now.


On Oct 13 12:30 AM JamesApple wrote:

> People are never kind to losers. Rim's loss of market shares to Apple
> will only snowball ending in total Apple dominance of the smartphone
> space and Rim's demise and subsequent bankruptcy.

Oct 13 09:56 AM

[Wireless Wiz:]

FUD Alert! FUD Alert! FUD Alert! Blackberry sales will drop exactly 23%!


On Oct 13 12:05 AM JamesApple wrote:

> Using Sun Tzi's Art of War, 'There are a hundred reasons for failures
> but only one for success'. Rim is pulling all its stops and pretty
> up all its numbers trying to sucker in the investors to buy the failing
> Rim.
>
> Rim is sold at more than 170 countries, any drop in sales of blackberrys
> translate into millions of units unsold resulting in multi-millions
> loss of dollars in sales, that is the problem with selling in so
> many channels spread out in so many countries, Rim MUST have a very
> high volume in sales in order to prevent drops in profit, but in
> the middle of the worst recession in 60 years, some call it a depression
> already, Rim's chance of escaping a double digit drop in sales this
> Christmas is higher than not snowing in Christmas. I think a 23%
> drop in blackberry sales this Christmas is highly likely. This Christmas
> appears to be an all-Apple Christmas, it is also the reason why Verizon
> is soliciting the help of Motorola and HTC Android heavily in hopes
> of salvaging its all-important Christmas season because the Buy1
> Get1 Free blackberry is simply not selling for the past 4 months,
> people are simply tired of blackberrys which had long been perceived
> as cheap junky giveaways,
>
> Look around, people who are hardcore texting addicts are using HTC,
> LG, Motorola, Nokia, NOT blackberries. People who are hardcore internet
> surfers use Apple, period. This leaves blackberrys out in the cold,
> to be frost bitten this winter and beyond. The big CAP players know
> that, that's why the big cap players dumped their Rim stocks in September
> leaving the stock down 22%. The other Rim investors had been steadily
> selling Rim stocks trying to salvage as much value as they can. Rim
> is now a sinking Titanic and there is no way the analysts can raise
> the Titanic from sinking all the way into chapter 11 soon.
>
> Rim has nothing new to sell, while everybody else is coming out with
> Android, webOS, iPhone OS, or other modern technologies directly
> addressing the needs of people, why would people want to buy old
> junky blackberrys even when they are being repackaged and released
> under new skin?

Oct 13 09:59 AM

[User 426260:]

The accounting change is primarily related to recognizing iPhone hardware revenue immediately, as opposed to over a two year period.


On Oct 12 10:06 PM Real Dave wrote:

> Cramer increased his price target for Apple to $264/ sh due to an
> accounting change that allows the software portion of their technology
> to be counted in their earnings. If this is true, shouldn't this
> change also increase blackberry's overall target?

Oct 13 11:06 AM

[JamesApple:]

Verizon is dumping slow moving blackberrys in favor of Android phones which have better push email, better keyboard, longer battery life, better screen color and resolution, lighter, sexier, faster, more rugged, responsive touchscreen, potent Android games and applications, broad social networking, lower in cost, higher quality, better brand name. Until Verizon can sell iPhones, there are no better deals at Verizon than these Android phones which may yet salvage an otherwise dismal Christmas season saddled down with the shelvebound BOGOberrys.

Oct 13 11:59 AM