Research in Motion Negativity Looks Overdone 34 comments
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In recent days I have been paying special attention to shares of Blackberry maker Research in Motion (RIMM). The stock had decent earnings this quarter but some investors wanted more, which prompted a pretty significant sell off in the stock. Despite the market having recently made new yearly highs, RIMM shares have dropped from the high 80’s to the mid 50’s. The stock is down several points Monday after the analyst who covers them for Citigroup downgraded it from “buy” to “sell.”
Skipping the “hold” rating completely is pretty rare on Wall Street, but what caught my eye even more was that the analyst lowered his price target on RIMM from $100 to $50. What happened to make the company worth 50% less overnight in his view? The upcoming release of Motorola’s (MOT) Droid smart phone.
Call me skeptical of this bold call from Citigroup’s research department. The new Droid is going to be such a huge success that it will translate into a 50% haircut in the value of Research in Motion, which has a stronghold on the corporate smart phone market? Have we not seen dramatic hype surrounding new cell phones recently that only served to disappoint investors? The Palm (PALM) Pre comes to mind immediately. While it may help Palm get back on the map, the Pre is certainly not looking like a genuine iPhone challenger like many were expecting. Should we believe that the Droid will similarly make a huge dent in RIMM’s Blackberry franchise?
I haven’t made the plunge into RIMM stock yet, but the odds are getting higher each day the stock continues to slide. At a current $55 quote, RIMM trades at 11 times 2010 estimates ($4.85 per share), which seems reasonable even if that figure proves too high due to increased competition. Right now I might just be willing to make the bet that the Blackberry retains its lead in the corporate market for years to come. If so, the stock looks pretty cheap here.
How have this analyst’s past calls on the mobile sector turned out? Pretty lousy, which is par for the course on the sell side. Monday the analyst upgraded Motorola to a buy and downgraded Palm and RIMM to sell. He initiated coverage for all three back in September 2007. Here is how the calls since then have turned out:
His track record on Palm has been decent: initiated at sell at $8, upgraded to hold at $6, and now back to sell at $11.
How about RIMM? Dismal. Recommended as a buy twice at $99 and $69, and now says you should sell in the mid 50’s.
Lastly, the Motorola record isn’t all that impressive either: hold at $18, buy at $12, hold at $6, buy Monday at $9.
All in all, the current negativity on Research in Motion looks overdone to me and as a result I am considering a contrarian investment. As always, please share your own thoughts if you care to join the discussion.
Disclosure: Peridot Capital had no position in RIMM at the time of writing, but is certainly taking a very close look at current prices.
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This article has 34 comments:
I have owned Motorola for quite some time (unfortunately) and the company has had no good products for the last three or four years. I find it appalling that anyone believes that RIMM will lose HALF of its value due to competition from MOT.
Why does anyone print his radical predictions when investors have so much money involved. Thank you Chad Brand for your article.
Suva do your homework.
iPhone and Apple may be preserved for some time, but the Android movement is hard to control/predict.
And Rimm should do something more than just providing new blackberries on their current paradigm.
RIMM survived Apple. Anything else is child's play.
Is there any chance that you can provide one or two concrete examples of why corporate clients will abandon Blackberrys in favor of the competition? For example, if smartphone XYZ offers everything a Blackberry offers at half the price, this would not be good RIMM. I do not think that offering 15,000 applications will be the deciding factor in a typical corporate purchaser’s decision. Corporate buyers want something that does what it needs to do, is reliable and does not cost too much. New technology that improves business efficiency is a bonus.
On Nov 02 02:43 PM JamesApple wrote:
> Rim's shares may seem undervalued because Rim is going to be out
> of business in a few years succumbing to being technological obsolete,
> and managerial incompetence. iPhone has already irreversibly surpassed
> the blackberrys in consumer smartphone space, capturing the top spot
> for user satisfaction in both consumer and business categories. Android
> addresses a whole lot more enterprise mobile needs and issues than
> Rim can ever address, and there are a whole army of smartphones using
> Android to create new smartphones which surpass Rim blackberrys in
> quality, enterprise and social/community mobile services, price to
> performance value, hardware such as camera, faster CPU, choice of
> makes, openness, flexibilty, modern technologies, Android has 15000
> apps against Rim's 2000 apps, Rim's hardware and software are a lot
> more restricted than Android's, costs of BES are exorbitantly high,
> Rim servers have a history of crashing, and a whole lot more Rim
> problems and issues that Rim customers used to bear when Rim was
> the only choice but now there are a whole lot more choices coming
> up, and that's not counting Apple's many inroads into the enterprise
> markets that Rim relies upon, Microsoft's dominant business position
> with its impending Win Mo 7, Palm Pre's superior multitasking Pre
> better suited to enterprise productivity than Rim blackberries, the
> fact that almost every other smartphones are better made and received
> than Rim pumping out old Unwanted outdated blackberrys wrapped in
> new skin. Rim is barely surviving in the longer term hanging by the
> smallest threads of remaining enterprise clients who are not expired
> in their Rim contracts but are increasingly using more American contents
> for the American companies. Rim's Storm 2 and Bold 2 are far 2 little
> 2 late. Rim has clearly demonstrated again that Rim cannot innovate
> and compete in the smartphone business. There are no reasons for
> Rim not being bankrupt no later than year 2012.
MM2, competition is brutal. Innovation can render companies with good products and smart managers obsolete. This happens all the time.
Having bought shares on the way down from $68 to $55, I hope Chad is right and JamesApple is wrong, but it would be nice to hear him flesh out the argument, to see if there is anything to it.
On Nov 02 03:29 PM Ricard wrote:
> Good article.
>
> RIMM survived Apple. Anything else is child's play.
Are there real indications that RIMM will start losing corporate clients in a big way? If so, it would be greatly appreciated if someone could share some specifics.
Is the momentum really all that negative at this point? Blackberry added 3.8 million subscribers last quarter. Has new business stopped on a dime since August?
On Nov 02 04:51 PM Kevin A wrote:
> For the most part, JamesApple is correct, although I think his 'out-of-business'
> prediction is WAY too extreme (odd to tag a strong argument with
> such an outlandish conclusion). You need to respect the simple concept
> of momentum, which RIM has - but in the wrong direction. With respect
> to consumers, momentum is always difficult thing to stop and reverse.
> There's a reason that AAPL is trading at 30x P/E, and RIMM only @
> 15x. If RIM does not innovate and recapture its lost brand equity
> soon, then I suspect that there will also be a revolt at the enterprise
> level. Given their current path, they won't meet their FY 2011 estimate
> of 4.86, so I wouldn't put too much faith into that number. [This
> is coming from a longtime Blackberry user.].
XLF support is about $13.50
IWM support is about $55
be careful out there.
As to Android superiority over blackberry OS, Corporate buyers want something that does what it needs to do, is reliable and does not cost too much. New technology that improves business efficiency is a bonus is a valid statement, but you forgot that the number 1 concern for enterprise is long term survival. An enterprise that cannot effectively differentiate its product and service offerings from the competition can simply not survive in the highly competitive, fast moving disruptive world. Android is an open system offering customizable layer allowing each enterprise to exploit this layer and differentiate their offerings with their specialized advantages. Rim blackberry OS is a closed and very restricted and limited system which can simply not allow enterprise specialization which is the key factor for long term enterprise survivals. Rim itself is a prime example of an enterprise that fail to differentiate or specialize as so many competitions are surpassing Rim in very threatening ways. I foresee Android reaching critical mass in enterprises which strive to differentiate and specialize to survive and emerge from this Recession, once Android reaches critical mass the enterprises will replace their Rim products with Android products literally overnight. This is Wall Street's view of the enterpises in the near future, and it is an accurate and correct view .
Thanks for the response, but it would be nice to hear some examples of RIMM's myriad problems. The only specific point you mentioned was the lawsuit, which is over, is it not?
Specifics about how Android will reach critical mass and render RIMM obsolete would also be greatly appreciated. Your comments sound like a glorified theory about what customers need. Most professionals just want something with a phone, e-mail, scheduling, and GPS would be a plus. If the company I work for is going to switch from Blackberry to another service provider, there will need to be a concrete reason (or reasons). Most of the options seem like more of the same from my perspective, except for Apple, which seems fancier (probably the reason we will not go this route). My failure to see the light could very well be because of my ignorance, but as ignorant as I am when it comes to technology, I can assure you our CEO is a couple of years behind.
On Nov 02 06:36 PM JamesApple wrote:
> 28% of Rim's revenue booked came from Verizon mostly because of the
> BOGO campaign. Now that Verizon brings its focus on Android with
> the Moto Droid coupled with other carriers rallying around the new
> Android 2.0 Rim will receive less vital revenue from Verizon and
> other carriers, Rim will also have to promote and advertise more
> on its own meaning more Rim costs and expenses against an already
> dwindling Rim margin on top of the $237 million IP lawsuit loss,
> and myriads of Rim problems internal and externally. Enterprises
> evolve in tandem, when critical mass of Android acceptance is reached
> amongst the enterprises, Rim will lose its reason-to-be and ceases
> to be an ongoing business entity.
>
> As to Android superiority over blackberry OS, Corporate buyers want
> something that does what it needs to do, is reliable and does not
> cost too much. New technology that improves business efficiency is
> a bonus is a valid statement, but you forgot that the number 1 concern
> for enterprise is long term survival. An enterprise that cannot effectively
> differentiate its product and service offerings from the competition
> can simply not survive in the highly competitive, fast moving disruptive
> world. Android is an open system offering customizable layer allowing
> each enterprise to exploit this layer and differentiate their offerings
> with their specialized advantages. Rim blackberry OS is a closed
> and very restricted and limited system which can simply not allow
> enterprise specialization which is the key factor for long term enterprise
> survivals. Rim itself is a prime example of an enterprise that fail
> to differentiate or specialize as so many competitions are surpassing
> Rim in very threatening ways. I foresee Android reaching critical
> mass in enterprises which strive to differentiate and specialize
> to survive and emerge from this Recession, once Android reaches critical
> mass the enterprises will replace their Rim products with Android
> products literally overnight. This is Wall Street's view of the enterpises
> in the near future, and it is an accurate and correct view .
Enterprises today suffer from lack of innovation because it is very expensive to differentiate products and services using fixed rigid infrastructures most enterprises have adopted. Blackberry OS is a fixed rigid infrastructure limiting the hardware and software aspects of Rim's products and services. Rim customers inherit this rigidity and are thus unable to deploy Rim for functions outside of email and messaging. Android is designed with layers of customizations allowing Android customers to modify or add functions and capabilities from hardware to software and application services which differentiate specialized advantages to the Android customer. For example, if a warehousing company deploys RFID and wants to hook up the RFID system to its truckers' handsets, the warehousing campany can modify the Android OS on their handsets adding RFID enabled code without disrupting the other functionalities already there. Blackberrys cannot because its OS does not allow OS kernel hashing (customization). This is only one example but you can see one distinct advantages Android has over blackberry OS. Enterprises buy devices hoping they are versatile and flexible. Android is definitely much more versatile and flexible than blackberry. Rim has no way to open up blackberry OS the way Android already is. For Rim to develop an Android phone would mean major disruption to existing enterprises forcing them to abandon the Rim platform altogether en masse.
Well, I suppose what I meant to say was that RIMM survived the initial onslaught, and has come out largely intact. I cannot say the same for the legion of much larger competitors in the iPod space. It has been two years, so RIMM has proven to be a survivor.
On Nov 02 04:41 PM Mark Alexander wrote:
> Ricard, what makes you think RIMM has "survived" Apple. Isn't the
> battle still on?
To be honest, too much flexibility can be a pain because it takes more to learn. This is not true for younger users or people who are really into technological gadgetry. The challenge for all the new technology is that by the time the young bucks are making the decisions, a newer better technology will probably come along.
It would be great to understand why RIMM is a bad investment so I can wisely dump and avoid further losses,so if anyone else can offer additional color, I will greatly appreciate it. Specifically, why will my company want to dump Blackberry when our deal expires? It seems like Blackberry will continue to appeal to relics like me, at least for a while, unless there is something that is clearly cheaper and better.
The company added almost 4 million subscribers last quarter (something like 40% growth on an annualized basis) and the PE (based on the most recent quarter, excluding litigation charges) is in the 13-14 range.
On Nov 02 09:20 PM JamesApple wrote:
> Thank you Mark. I will be brief.
>
> Enterprises today suffer from lack of innovation because it is very
> expensive to differentiate products and services using fixed rigid
> infrastructures most enterprises have adopted. Blackberry OS is a
> fixed rigid infrastructure limiting the hardware and software aspects
> of Rim's products and services. Rim customers inherit this rigidity
> and are thus unable to deploy Rim for functions outside of email
> and messaging. Android is designed with layers of customizations
> allowing Android customers to modify or add functions and capabilities
> from hardware to software and application services which differentiate
> specialized advantages to the Android customer. For example, if a
> warehousing company deploys RFID and wants to hook up the RFID system
> to its truckers' handsets, the warehousing campany can modify the
> Android OS on their handsets adding RFID enabled code without disrupting
> the other functionalities already there. Blackberrys cannot because
> its OS does not allow OS kernel hashing (customization). This is
> only one example but you can see one distinct advantages Android
> has over blackberry OS. Enterprises buy devices hoping they are versatile
> and flexible. Android is definitely much more versatile and flexible
> than blackberry. Rim has no way to open up blackberry OS the way
> Android already is. For Rim to develop an Android phone would mean
> major disruption to existing enterprises forcing them to abandon
> the Rim platform altogether en masse.
We have well over 10,000 Blackberries deployed world wide, we have a total of 5 iPhones and ZERO android devices .. the simple matter is NOTHING on the market can match RIM's backend that makes this all work and provides enterprise with the management and security needed to support enterprise mobility. I suppose we should all just install iTunes and forget any security / regulatory mandates we have. If / when these consumer devices can provide that - and it's coming along via 3rd party solutions it will be a hard CB / TCO / ROI discussion - until that happens .. it's your own little pipedream. Please let me know when ANY company is purchasing and deploying iPhone or Android devices .. not personal liable .. CORPORATE liable. Huge difference.
Android and iPhone have a huge disadvantage - they only work with Exchange ActiveSync. So touch luck for companies running Lotus Notes, Groupwise etc. Android doesn't even support half the security policies iPhone 2.0 did. Why do you think anyone would go for LESS security considering the continuing data protection regulation and fines for lost data? As I noted above to get what RIM provides via their server solution, you need a 3rd party solution which is often equal is not more expensive - so again where is your CB to explain to your CTO/CIO why you should switch??
Watching the World Series I see a Blackberry ad every other commercial so they are getting their name out there and unlike Apple has devices on every carrier on the planet. You still living that Verizon iPhone dream? Please stop your BOGO madness - that is a VERIZON program made to provide VERIZON with 2 data plans (hence they make profit). RIM makes the sale on the 2 devices only. It's a nice way for verizon to get data customers and RIM to keep clearing stock.
On Nov 02 09:53 PM Ricard wrote:
> LOL, touche.
>
> Well, I suppose what I meant to say was that RIMM survived the initial
> onslaught, and has come out largely intact. I cannot say the same
> for the legion of much larger competitors in the iPod space. It has
> been two years, so RIMM has proven to be a survivor.
Basically I think you are spot on. I'm not a financial analyst, but a software developer. From a technical point of view I can tell you that there are a lot of warning signs of trouble ahead for RIM. For one, the development environment is miserably primitive, which shocked me because of how long RIM has been around. For another, RIM's support is miserable. Finally the whole software platform is 1980's with a thin veneer 2000: very shaky, and prone to crashes.
I'm really worried about what I see under the hood.
RIMM is really volatile, buy VZ instead if you want stability in the space. VZ under $29 seems really good as well.
Frank. All you can see is administrative ease, security issues and backend Rim servers. All revolving around simple email and messages and some documents specifically Microsoft SharePoint servers can do a far superior job than anything Rim can ever provide. There is not a single business need you care about, you may as well work for the FBI ensuring maximum security on every piece of data perhaps surpassing even the NSA!! You are just a security freak but the sad truth is NSA is far more secure than Rim can ever be, why don't you go work there?
Remon. I used to work at Rim. Rim BES and blackberries have so many bugs and outages Rim programmers constantly crossed their fingers every time there was a new release. The busiest corporate app running was the Rim RMA application which is Rim's Return Management Application which handles tons of returned Rim blackberries due to numerous defects and bugs. Rim used to laugh at the RMA problems when Rim was the only smartphone around but not anymore as so many customers just got totally fed up with lousy blackberry workmanship and stupid defects such as the trackball. The blackberry OS is so flaky, extremely difficult to program with. The Rim developer support is just as lousy and arrogant as the RMA team. Most of them are simply inept as they pass you around when you look for answers they just don't have. The calibre of Rim employees are very low. Perhaps only 1 out of 30 know what they are talking about, Rim is deadwood country. Rim is the most chaotic, random, ignorant company I've ever worked at and I have worked at a lot of Fortune 100 as well as SME companies in North America as a consultant.
Keep your dream alive - meanwhile being a "security freak" I'll keep making sure iPhones and Androids never connect to our network unless they provide the same level of control and security that RIM does. I'm not being anti anyone. I've used pretty much every mobile device and carry a iPhone 3GS, Blackberry Tour as well have a Pre. VZW will likely share the droid with us but I doubt they will even care pitching it as a enterprise device as everyone knows how Apple failed making any traction. Any company that has Blackberry and BES - that is the standard, if another device cannot match that why bother? That my friend is reality.
Does RIM need a shiny new OS? Sure - it's what consumers want. But if anyone thinks RIM will turn into Apple that is an expectation that will never be met. Will Apple ever be Microsoft?
Unsure what application you are trying to develop but if you get stuck I have many internal contacts at RIM and around the industry that would be happy to help you out.
On Nov 02 10:35 PM Remon wrote:
> James,
>
> Basically I think you are spot on. I'm not a financial analyst, but
> a software developer. From a technical point of view I can tell you
> that there are a lot of warning signs of trouble ahead for RIM. For
> one, the development environment is miserably primitive, which shocked
> me because of how long RIM has been around. For another, RIM's support
> is miserable. Finally the whole software platform is 1980's with
> a thin veneer 2000: very shaky, and prone to crashes.
>
> I'm really worried about what I see under the hood.
On Nov 02 02:43 PM JamesApple wrote:
> Rim's shares may seem undervalued because Rim is going to be out
> of business in a few years succumbing to being technological obsolete,
> and managerial incompetence. iPhone has already irreversibly surpassed
> the blackberrys in consumer smartphone space, capturing the top spot
> for user satisfaction in both consumer and business categories. Android
> addresses a whole lot more enterprise mobile needs and issues than
> Rim can ever address, and there are a whole army of smartphones using
> Android to create new smartphones which surpass Rim blackberrys in
> quality, enterprise and social/community mobile services, price to
> performance value, hardware such as camera, faster CPU, choice of
> makes, openness, flexibilty, modern technologies, Android has 15000
> apps against Rim's 2000 apps, Rim's hardware and software are a lot
> more restricted than Android's, costs of BES are exorbitantly high,
> Rim servers have a history of crashing, and a whole lot more Rim
> problems and issues that Rim customers used to bear when Rim was
> the only choice but now there are a whole lot more choices coming
> up, and that's not counting Apple's many inroads into the enterprise
> markets that Rim relies upon, Microsoft's dominant business position
> with its impending Win Mo 7, Palm Pre's superior multitasking Pre
> better suited to enterprise productivity than Rim blackberries, the
> fact that almost every other smartphones are better made and received
> than Rim pumping out old Unwanted outdated blackberrys wrapped in
> new skin. Rim is barely surviving in the longer term hanging by the
> smallest threads of remaining enterprise clients who are not expired
> in their Rim contracts but are increasingly using more American contents
> for the American companies. Rim's Storm 2 and Bold 2 are far 2 little
> 2 late. Rim has clearly demonstrated again that Rim cannot innovate
> and compete in the smartphone business. There are no reasons for
> Rim not being bankrupt no later than year 2012.