RIMM is projected to grow earnings by about 32% next FY over this FY and Christmas electronics fever is going well for RIMM. The high growth rate will reduce the current 60 P/E to a 29 P/E next year. Not all the news is good though.
• The stock is down 10.5% from its 52-week high reached on November 24 [10 trading days ago].
• 3 downgrades were issued in the past 30 days [current consensus is 2.4 on 1-5 scale]
• A new patent infringement lawsuit was filed
• They are experiencing difficulty filing restated Q2 results due to investigation of possible stock option grant problems
• They may be about to experience expense ratio pressures to support the push into consumer markets with the new Pearl
• The Pearl appears to be cannibalizing existing BlackBerrys [60% to 70% of Pearl sales replacing other BlackBerrys] resulting in growth of subscriber access fees lagging hardware sales growth
• Major companies with deep marketing pockets are entering the consumer side of the smartphone market [particularly Motorola (MOT), Samsung and Nokia (NOK)], creating substantially greater competition in the consumer market than RIMM has experienced in the enterprise market.
• Microsoft’s (MSFT) push to the enterprise market for Win Mobile smartphones that work with its Exchange Servers will increase pressure on RIMM in the enterprise market too.
Sources of Revenue
RIMM’s primary revenue stream is its BlackBerry wireless platform. RIMM generates revenues from service billings to its BlackBerry subscriber base primarily from a monthly infrastructure access fee to a carrier/distributor where a carrier or other distributor bills each BlackBerry subscriber.
An important part of RIMM’s BlackBerry wireless platform is the software that is installed on corporate servers and/or desktop personal computers. Software revenues include fees from:
i) Licensing RIMM’s BlackBerry Enterprise Server software
ii) Client access licenses, which are charged for each subscriber using the BlackBerry service
iii) Maintenance and upgrades to software
Revenues are also generated from sales of accessories, repair and maintenance programs, non-recurring engineering services and technical support.
The Handset Replacement - Maturation
If more than 2/3 of Pearl sales are replacing older BlackBerrys, only 1/3 of Pearl sales are adding to the monthly subscriber access fee revenue. Similarly, if other new models, such as the 8700 series, are sold substantially to replace older models, that too would not be adding to the monthly subscriber revenue base.
To the extent that not all new equipment sales go to new subscribers, the access fee income will grow more slowly than the handset sales, resulting in a moderation of the overall corporate revenue growth.
That means that as aggregate revenue and earnings growth slows, the P/E ratio must contract to keep the PEG ratio within acceptable limits. On the psychological front, slowing overall revenue and earnings growth will come as a rude surprise to pure stock price momentum investors who are not reading the fundamentals.
On the Other Hand [and on the lighter side]
On top of all that bad news, they have a left-handed market problem:
I love my 8700 series BlackBerry and find its trackball one-hand operation a very convenient feature. However, the BlackBerry is substantially inaccessible to the left-handed population, which is more prevalent in the young (technology adopters) than the old.
Wikipedia describes the distribution of US left-handedness this way:
• Total US population 8% to 15%,
• 20-year olds 12%,
• 50-year olds 5%,
• 80-year olds 1%.
They explain the low occurrence in older populations in terms of former pressures on youth to learn right-handed skills in spite of their natural tendencies.
On BlackBerry’s website FAQ they say:
Q: Is a BlackBerry device available for left-handed users?
A: The track wheel on each BlackBerry device is located on the right of the device, and can be easily accessed with your right thumb or your left middle finger. [This writer’s translation: “No”]
Other major smartphones such as the Palm (PALM) Treo, the Samsung BlackJack, the Nokia e62, and the Motorola Q [and probably the future Apple (AAPL) iPhone and the Microsoft ZunePhone] do not use a trackball and therefore are left-hand, right-hand neutral.
Except for those left-handed people who have learned to work both sides, BlackBerry has minimal access to 5% of 50-year olds and 12% of 20-year olds.
Deliberating on accessibility for the left-handed market is dear to the hearts of left-handed people, but to those left-handed people who are invested in RIMM a more important comment comes from this weeks Barron’s quoting analyst Fred Hickey as saying:
“In an echo of the 2000 tech mania, the analysts covering Research in Motion don't seem to be fazed by the fact that its market cap is now up to $26 billion, or 11 times sales. … [Research in Motion's] valuation is certifiably insane!"
Disclosure: Author is long PALM stock