Research In Motion: Still the Best Positioned Smartphones Play

I am amazed at the line forming to attend the funeral of Research In Motion (RIMM). In just one week we have a Citigroup analyst downgrade and The Wall Street Journal warning about the growing competition from Google (GOOG) Android software for smartphones from Motorola (MOT). Then TheDeal.com suggests RIMM could be taken over.

RIMM has responded by announcing the buyback of $1.2 billion of its shares. The message from the firm by this action is clear. It believes its stock is cheap and so do I. Analysts are expecting an increase in both revenue and earnings this quarter and next year. However, they are predicting a slowdown in growth rate. A big point, they are predicting growth. The big questions at the brokers right now, are how much of a slowdown will we see and how will the forecast for next quarter be handled?

A major source of anxiety is currently coming from the impact of increased competition. In reality, RIMM has always had its products sold side by side with competitors. Verizon (NYSE: VZ) already offers Android handsets, AT&T (T) offers the iPhone and T-Mobile offers a multitude of handsets. The real losers over time will be the manufacturers not focused on designing and selling smart phones. Firms offering lower-end handsets have already seen commoditization and margin erosion even in an expanding market. Also note when it comes to having its products sold in a multivendor environment, RIMM is a cash cow for the carriers. None of the carriers is going to throw RIMM under a bus for the Driod. They have already proven that they can sell both successfully.

I do not for a minute believe that RIMM will out-sell Apple (AAPL) to consumers. I also believe Google can innovate swiftly and maybe one day take some meaningful share away from AAPL. However, GOOG does not have both hardware and software control the way Apple does. Droid and iPhone will be an interesting competitive case study in innovation and product advancement. RIMM, despite competition from AAPL and Android, will grow in 2010 due to the relatively modest global smartphone penetration of roughly 15% of overall handsets.

It is also reasonable to expect RIMM to benefit from the return of enterprise spending both in the US and abroad, which has been largely absent from the growth side of the company’s revenues over the past six quarters. This could be a game changer in 2010.

RIMM remains the best positioned pure play in smartphones. This far into its quarter it is reasonable to assume that the firm is tracking within its guided range of $3.6 - $3.8 billion in revenues and 4 – 4.3 million new subscribers.

The pace of revenue is directly tied to margins which is another concern of analysts. Although margins will probably not be expanding this quarter, I believe if the number of new subscribers is near plan, that margin erosion will slow down or stop.

Despite its stodgy reputation, R&D and innovation is not asleep at RIMM. Over the summer it acquired Torch Mobile, a mobile Web tools developer, and there are plenty of internal projects in progress.

Most analysts have a price target far higher than the stock is now. I am a holder waiting to be vindicated at earnings which are coming in just over a month. It is hard to believe that a more commoditized firm like Nokia (NYSE: NOK) has the Street assign it a multiple double that of RIMM. From my calculations, RIMM’s P/E and PEG ratios have been knocked so low and the company is so profitable, perhaps we need to start viewing RIMM as a major value.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long RIMM, AAPL, GOOG, T and VZ.

Comments

[lucky lenny:]

Andrew, I agree. From a personal level, I don’t know of too many people whose companies have switched from Blackberry to the iphone, android, or any thing else.

I know in my company, security is #1 priority. BB does it all & is the most secure; so we're not switching. However, if anyone knows of a company that is switching off the Blackberry, please indicate how many users & the reason why. Thanks.

Nov 06 05:26 AM

[Timeline St...:]

RIMM may very well increase in value as speculators flood back into its shares, but this won't be a long-term increase because nothing has fundamentally changed with the company's (in)ability to innovate. They have squandered years in which they could have been innovating for real, and are now fading fast.

You're obviously smart, you are managing other people's money. I really don't understand why it's not obvious to people like yourself, when you look into the future, to see how RIM will have trouble staying viable. Perhaps you are on the East Coast, on the Verizon network, and surrounded by people with Blackberries, so you have a bias. They are swimming against the tide for many different reasons: (1) Lack of touchscreen devices, despite obvious market direction toward touchscreens; (2) very slow development in apps; (3) heavily tied to one carrier, Verizon, who sees the writing on the wall and is pushing Android to compete with iPhone; (4) serious hardware limitations.

Mentioning this or that acquisition that RIM has done, or their supposed 'innovation' is not going to cut it. They should have been innovating in 2005 when they had the lead. Now they are playing catchup like a bunch of other sad-sack companies, trying to be belle of the ball once again. Why should I bet on RIMM with my investment dollars, when I could choose MOT - who clearly acted with urgency - or AAPL?

Can you honestly tell me what RIMM will report on December 17th? Because I have no idea. What will be the stock price on December 18th and why should I think it won't be cheaper then?

Riddle me this - if many people prefer anything other than AT&T, and Verizon accounts for 1/3 of RIM's sales, what happens when iPhone goes to another U.S. carrier? What happens today - on Verizon - when the Droid is another option? How many fewer Blackberries get sold then?

Look into the future man, it's clear as day. When the CEO of a company is off trying to buy hockey teams, his head's not in the game.

Good thing they have another CEO for a spare. Just another buy-one-get-one-free deal from Blackberry.

Nov 06 05:28 AM

[FreeRange:]

Complete nonsense. In the long view, RIM is in trouble. It can not compete effectively as it is not a comprehensive platform phone - it is a one trick pony. Nowhere near "the best" positioned.

Nov 06 05:32 AM

[JamesApple:]

It is blind faith on Rim investors more than rationale than binds them to this company that had run out of competitiveness and rapidly running out of investor capital since the big cap investors fleed the Rim stock for good back in September.

This is similar to the investors who lost a lot of money investing in Nortel.

Nov 06 06:16 AM

[Julian Ivan...:]

The blind leading the blind. RIMM is facing its most competitive challenge in its history, has an OS that's about 10 years out of date, and yet chooses to spend money on a stock buyback to support its shareholders/hedge fund shills rather than investing in more R&D to improve its margins and help reduce its costs.
Last sign of a desperate company shrieking of its relevance. Remember DELL's massive buybacks?
Enough said.
Why invest in RIMM, which is losing market mindshare, when you can invest in AAPL, which is growing all over the world, both in mindshare and market share?
RIMM is so 2004.

Nov 06 06:36 AM

[Julian Ivan...:]

Here's your biggest blindspot: You recognise that "not for a minute" do you think RIM will outsell Apple in the consumer market, but you say: "It is also reasonable to expect RIMM to benefit from the return of enterprise spending both in the US and abroad, which has been largely absent from the growth side of the company’s revenues over the past six quarters. This could be a game changer in 2010."
Here's the news you won't talk about: given a choice, virtually every report from executives at Fortune 500 companies offered the chance to switch to an iPhone are choosing to switch. The company standing to benefit the most from a pickup in enterprise spending isn't RIMM, its AAPL.

Nov 06 06:40 AM

[lucky lenny:]

Here's a review from a BB user who tried going w/ the iphone. I think this shows why BB's extensive user base is not going anywhere anytime soon:

iso-100.com/blog/post/.../

Nov 06 07:05 AM

[Julian Ivan...:]

Lenny... did you check the date of that report? Its August... 2008... a whole generation of iPhone/iPhone OS ago.
Virtually every issue the BB user complained about has been remedied now.
You're using a 15-month old comparison of a BB user's experience trying an iPhone to try and illustrate why BB users won't switch now. The smartphone world has been turned on its head in the last 6 months, let alone the last 15. This isn't you're grandfather's smartphone world, so to speak :)

Nov 06 07:35 AM

[lennywon:]

It is difficult to believe that 40+ analysts, excluding Jim Suva, still believe RIMM has potential upside, otherwise one would have expected them to downgrade by now, right? Is it possible that they are on an inside track of sorts, have a clearer understanding of the handset business of RIMM and the broader markets in general?
One thing I am very curious to comprehend is when all these Android phones are launched by all these handset mfgs. and touted as Iphone or Blackberry killers by all the various vendors, what will be the consumer reaction? How will that buyer know which of the many will be right before signing that 2 year contract? Will they avail themselves countless hours to wade through all the nuances between one android vs. another and still another? Perhaps they will all become commodities with no real differences at all, save for price. Now wouldn't that be something!

Nov 06 07:45 AM

[Timeline St...:]

Lucky Lenny, I read that blog and the writer's opinions are legitimate and well-written.

However......I'm guessing that out of 5 people who carry Blackberries, perhaps 2 will appreciate the blog that you reference. This means that 3 out of 5 are candidates for switching to something else, be it iPhone, Droid, whatever. That's a problem for RIM. They have no current solution for this problem, and I'm guessing - based upon their track record of introducing the same thing with some slight improvement - that they have nothing substantial in the pipeline.

If the RIM argument comes down to safety and security that mandates acceptance by large corporations.....well, that sounds a lot like a utility company and not a technology company.

People assume that iPhone sales are rising because overall smartphone sales are rising. I would go a step further and suggest that smartphones sales are rising precisely BECAUSE iPhone sales are rising. iPhone has raised expectation levels for all smartphones, not just those made by Apple. In this manner, it has pulled the market along with it, by forcing handset makers to develop more quickly in order to survive. Touch screens, app stores, browsing, syncing, GPS, and other iPhone features have raised the bar, and handset makers who have embraced this future have a realistic chance to outperform the competition.

I am afraid that RIM does not show that urgency.

And if you think that Apple is not working on many of the legitimate issues, then you're looking at a different company than I am. Probably the biggest of them, battery life, is a tough nut to crack because it's pushing the limits of physics. I would suspect that battery life for all devices is a very hot topic at Apple.

Go Google another arcane reference from a non-switcher. I bet I can find 10X more in the other direction.

Nov 06 07:55 AM

[lucky lenny:]

Sorry for posting an older comparison - my bad - there were quite a few hits. I was actually looking for whole companies making the switch & didn't find any. If that happens, then I think BB's demise may happen. However, between the $1.2 bill stock buyback; positive sales projections on last earnings call; huge installed customer base; Storm 2; and superior security features, I think the more probable scenario is that RIMM grows; just at a much slower pace than the Iphone.

Nov 06 08:28 AM

[pk de cville:]

Here's the business argument for iPhone.

Highly competitive creative businesses are using it in very innovative ways. How long will it take for testimonials like these to open the doors to large enterprise environments?

www.apple.com/iphone/b...

And also, "iPhone has raised expectation levels for all smartphones..."

One thing I've noticed about friends who are skeptical about the iPhone's reputation: They assume that new competing smartphones are better than the REAL thing and buy something else because it's not an iPhone!

Some of these friends are now regretfully waiting their contracts out to get an iPhone.

Sorry, seems to me the iPhone and Android will be competing with each other while taking major market share from Windows Mobile and Symbian, and, to a lesser extent, from RIMM.

Nov 06 09:09 AM

[Roger Knights:]

There's a devastating InfoWorld review of RIMM's Blackberry, at www.infoworld.com/d/mo...

"Deathmatch: BlackBerry versus iPhone: It’s time for us to bury the BlackBerry and move on to modern mobile -- even for e-mail

"By Galen Gruman / InfoWorld / MAY 26, 2009"

It concludes, "For everyone else, the BlackBerry is yesterday's mobile messenger, way past its prime and heading toward retirement. The iPhone is light-years ahead of the BlackBerry on almost every count."

Subsequently Gruman felt betrayed and wrote about it when a revision to the iPhone's OS made the basic iPhone (not the GS version) inoperable with Microsoft's Office interface if hardware encryption security is enabled. But still, the iPhone GS is way ahead of the BB, and worth the extra $100 to a company.

Nov 06 11:39 AM

[Roger Knights:]

PS: "Motorola's (MOT) Droid is more likely to be a "Research in Motion (RIMM) killer than an Apple (AAPL) killer," remarked Cramer, who criticized RIM for buying back stock rather than finding new ways to grow the company."

Nov 06 11:42 AM

[boisterousbob:]

We do see that VZ has positioned RIMM against other phones for some time. Of concern to me, though, is VZ seemingly positioning the new MOT phone as its new flagship product. If we believe marketing can make a difference, and as VZ is pouring money into Droid as its "biggest marketing campaign ever", then this has to concern RIMM stock holders.

Long RIMM and not bashing, but RIMM do rely on network operators to market their product and so I do have concerns in this area. Let's watch how splashy and successful this marketing campaign really is.

Nov 06 12:19 PM

[CGP:]

"Game changer" and RIMM shouldn't be associated together anymore. It seems to me this co. is no longer a momentum play and has become a value play (i.e. talk of multiples and relative valuation). Growth companies don't buy back shares, companies managing their share price do.

Buy based on how much longer you think they can milk the cow (probably a few more years at least).

Nov 06 12:29 PM

[boisterousbob:]

I would have thought this list is testimony to AAPL's abject lack of interest in corporates so far. Kraft is the only notable large multinational that I see. Can you imagine what this list would look like for RIMM?

AAPL has no history of great success with corporates in any of its product lines. Maybe this is about to change, but I just don't see the focus on it.

iPhone is a nightmare to deploy in a corporate environment compared with a Blackberry. For a start you have to disable most of its features such as access to appStore, integration with non corporate email systems etc in order to make it safe enough to use. And, I'm sorry, what exactly IS an iphone without these features? Then you are missing features you need which are antiethical to AAPL, such as native ability to read MSFT format documents.

I am sure AAPL could crack this market, I just don't see them trying.


On Nov 06 09:09 AM pk de cville wrote:

> Here's the business argument for iPhone.
>
> Highly competitive creative businesses are using it in very innovative
> ways. How long will it take for testimonials like these to open the
> doors to large enterprise environments?
>
> www.apple.com/iphone/b...
>

Nov 06 12:34 PM

[CGP:]

@boisterousbob:

I agree. AAPL is firmly entrenched as a consumer product first, everything else is secondary - they're more interested in innovation than stodgy markets. When talking enterprise, you're talking scale, think GE, Exxon Mobil - they don't want a relatively fast moving technology target as they have to test, roll-out and support so many people not to mention institutional inertia. Consumer is a more personal decision and can move more nimbly. Maybe some 500 member or fewer size firms will migrate to iPhone because it's more manageable to support on that scale. Probably more important to Enterprise is the apps their customers can use to do business with the company.

Nov 06 12:53 PM

[JamesApple:]

Rim blackberrys are like 99 year old clerks working behind a counter of an old post office in a one horse town.

What makes you think Apple cannot make a new iron clad secure corporate smartphone designed and produced in conjuction with the American world leading RSA Corp. which, Rim had hardly produced any breakthroughs in over-the-air encryption in a joint venture with RSA, mainly because of Rim's ineptness. Apple on the other hand, had already significantly bolstered the iPhone in corporate security and manageability. Apple is tailoring a top security business smartphone that would make Barack Obama proud and immediately use in all presidential capacities, instead of still carrying that 1980ish unsafe blackberry which he is prohibited to use in any presidential duties.

The smartphone market is now for Apple to lose, Rim is already irrelevant.

Nov 06 01:27 PM

[boisterousbob:]

On Nov 06 01:27 PM JamesApple wrote:
>
> What makes you think Apple cannot make a new iron clad
> secure corporate smartphone

Nothing. You completely missed the point. I didn't suggest AAPL "couldn't do this". I suggested that they are not trying to.

Nov 06 01:47 PM

[LaChic:]

I do not agree with the author, rimm was a sell at 85, and is a sell now, I would not touch rimm unless it comes down to the mid 40's or upper 30's. Rimm is strugling right now, and next year i expect the strugle will increase. 10.2 unemployment rate does not help and no matter how many positives things you guys want to spin into this stock the stock is a dead trade unless you are short.

Nov 06 02:07 PM

[LaChic:]

let me remind you folks that unemployment rates are most likely to go to 11 or higher next year, we don't know how high it will get and for how long we will stay that way, rimm cannot survive on just sales from outside of this country, Rimm needs this country badly, with folks cutting back on everything, I pretty much doubt it anyone will be buying Rimms like hot cakes. Don't be a fool.

Nov 06 02:20 PM

[oghowie:]

Until RIMM completely overhauls the Blackberry os and gets a decent web browser, I'd stay away from this stock.

Nov 06 06:46 PM

[JamesApple:]

Home of Rim blackberrys, Waterloo, Ontario, Canada, has been a virtual ghost town for a couple of year. Rows of quiet empty plants and warehouses sprawling the entire town, rusting away before the paint on their walls were even completed. In this BlackBerry town I hardly see anyone carrying a BlackBerry. Even the University of Waterloo students are mostly seen carrying Apple MacBooks and a few Nokia and Samsung phones. Some of them were at a loss of words when asked about those Rim buildings. That is such a huge contrast when I was asking for direction for the Apple HQ while I was in Cupertino, even the boy could point me to the 1 Apple Way where the Apple HQ is, while the Rim HQ is on some Waterloo street called Columbus which was hard to find. Waterloo was a gloomy town since 2007 and it's getting run down even more.

Nov 06 11:11 PM

[heh:]

finally good to see a sober article. alot of analysts don't understand the business and talk alot of hot air. rim has always had a pessimist crowed on its tail thats heavily invested into shorting and dont wanto see it shine. ignoring the fact that rim is still a major player, foothold in the gov and corp world, growing consumer base worldwide. i mean sure there's competition but look at what's out there android on a crappy MOT product?? *yawn n than they wonder why no line ups, nobody cares its a bit too late. the iphone is the only real competitor. with holiday season buybacks, n being cheap as it is, this stock definitely has potential

Nov 07 10:06 AM

[trendspeak:]

In Asia, no one uses Rim and their push messaging doesn't mean anything here. I don't see where their growth will come from.

Nov 09 10:48 PM