Is RIM Another Palm in the Making?

by: TMT Analyst

Research in Motion's (RIMM) shares are up 3% year-to-date vs a 6.4% move up in the S&P500. The shares trade at 13.4x 2010 EPS, not entirely egregious, and below Apple's (NASDAQ:AAPL) 2010 PE of 19.5x.

The investor base has bifurcated into those who love the stock and believe in its longer-term prospects and those who loathe the very mention of RIMM. A full 20% of the shares are sold short.

The shares are broadly covered with 36 buys, 14 holds, and 5 sells, according to data from Bloomberg. Thus, the sentiment is positive.

Last week, RIMM reported disappointing results (see earnings call transcript here) with revenues, EPS, and unit shipments coming in lower than consensus, mainly due to its North American operations where it is in a heated battle with Apple and Android based phones, the two "A"s. Revenue guidance for 1Q was at the low end of consensus while EPS came in ahead of consensus.

The shares are down 6% since the report and could decline another 50% if RIMM does not find a means, via a super hot new smart phone, to combat these secular threats.

RIMM is presently the leader in the Smart Phone market with 42% share in the U.S. Apple is second with 25% share, Microsoft (NASDAQ:MSFT) with 15%, Google (NASDAQ:GOOG) with 9%, and Palm (PALM) with 5%, according to a February report from comScore.

However, according to a survey from Crowd Science, 90% of iPhone and Andriod phone users will stay with their brands, while 40% of Blackberry users continue to prefer Apple's iPhone as their next smartphone purchase, and 32% of them would also switch to the Android operating system.

If this survey proves accurate, RIMM is, to put it not so lightly, royally screwed and will likely suffer the same fate as Palm. RIMM's architecture essentially prevents them from functioning like a true smart phone and their OS limits their ability to support app development. While RIMM continues to work on addressing this shortfall, their competition continues to power ahead. This reminds me of Yahoo's (NASDAQ:YHOO) Panama vs Google. Google continued to race forward while Panama tried to play catch-up. It never worked. In addition, pricing pressures will likely continue to impact RIMM as well and ASPs will continue to suffer.

Until RIMM develops a competitive smart phone I would stay clear of the stock.

Disclosure: None