As Apple’s Worldwide Developer Conference (WWDC) kicked off on the week of June 6th, traders bearish on Research In Motion (RIMM) looked for any signs of mounting pressure on the Blackberry franchise.
The purpose of this article is not to challenge the valuation and expected growth rates of Apple (AAPL) shares as sentiment for the stock is still positive. The purpose of this article is to analyze the current valuation of RIM shares. RIM is worth between $35 and $100. Its valuation depends on the varying margin of safety demanded by investors.
Other than failing to break $350 on six occasions in 2011 (a bearish pattern from a trading perspective), Apple is still inexpensive (p/e is 16), relative to new issues (LinkedIn (LNKD) and Groupon's GRPN).
If sentiment for Apple were negative, analysts would go about voicing bearishness for Apple's innovation. The innovation in iOS is mostly coming from re-inventing the wheel of its competitors, as presented at WWDC this week.
Notable "Innovations" with iOS are:
the iOS 5 notification system is remarkably similar to that of Android
Both the camera picture from the lock screen and automatic WiFi sync media are similar to Microsoft’s Windows Phone 7
iMessage is similar to Research in Motion’s BBM
It is expected that bearishness and calls of RIM’s demise will grow louder, up until RIM reports earnings on June 16th. Currently, investors are focusing on the headline growth deterioration in North America.
The current bearish views are unfounded.
iMessage is not a Blackberry Messenger (BBM) killer, because BBM is a superior product in areas where a heavy data plan is too expensive. BBM is central to RIM’s growth outside of North America. The voice plus BBM services plus cheap blackberry handset is far less expensive for consumers in emerging markets than an iPhone offering the same plan. iMessage may still require a more expensive data plan, whereas BBM may be sold without a full data plan, with BBM data going through RIM's servers. Apple would need to sell a cheaper version of the iPhone worldwide to compete with RIM.
Playbook advertising will ramp up. iPad is seen everywhere, and that Playbook is nowhere was expected, statistically. There are 25 million iPads sold worldwide. Playbook may have sold 50,000 units on opening day, and may have sold 210,000 units for the quarter. That is the same as saying the chance of seeing a Playbook "in the wild" in North America is 1 in 500 at best (and 8 in 1000 to-date). Granted, RIM could have done a better job with its channel partners in ensuring adequate marketing of the device at the stores (stores with Playbook demo units with Wi-Fi not set up and OS OTA updated could not showcase the power of the browser and Flash support). Ads for Playbook on the television and print are only starting to ramp up (RIM appears to have spent most of its ime using twitter and facebook to soft-advertise its launch, leaving critics to cover the Playbook).
Unit sales of Playbook are more likely to surprise on the upside, if RIM reveals any unit sales. Using activity at RIM’s AppWorld and monitoring customer activity at Best Buy (BBY) and Amazon.com (AMZN), RIM likely sold somewhere between 185,000 and 210,000 units in the quarter. This adds $0.06 assuming a 25% margin. (Aside: As a Playbook user, the 7”-size fits in a small bag, is under 1 pound, and is a truly a device that can be carried around anywhere).
Market share loss is isolated to North America. Headline news does not consider worldwide sales. ComScore figures illustrated RIM lost market share from Apple and Android in North America. However, RIM retained its lead in Canada, according to a study completed by Quorus. RIM’s phone is seen as a value proposition, which ensured market share growth in the emerging markets. Still, Apple grew iPhone sales to 10% in China last quarter.
QNX is the successor to OS6/7. Anyone trying QNX on Playbook will like the fluidity of the OS that makes full use of a dual core processor. The user-interface on Blackberry OS6/7 is similar to QNX for Playbook, making it easy for Blackberry fans to transition to the new platform. The operating roadmap includes support for flash-based and android-based applications, enabling RIM to offer more apps over time for QNX.
Bold Touch release is on schedule. A few days ago, a rumor of the delay was started from a website (which also incorrectly claimed Microsoft (MSFT) would buy Nokia (NOK)) questioning the release of the Bold line-up. The design is appealing to existing blackberry fans (due to specifications, thin design, and keyboard) but is incompatible with QNX since it is a single core. This design suggests that the refresh is an incremental one, so RIM will have time reading OS 7 later this summer.
Worst-case valuation is used to determine an appropriate margin of safety for RIM shares. EPS declines for fiscal 2012 (-18% opposed to guidance provided by RIM management) , 2013 (-43%), and 2014 (-18%), and an average growth rate of 7.8% between 2007 - 2014 is used to arrive an average $4.17 EPS:
|Average (2007 - 2014 only):||$4.17||7.8%|
Share Price versus Margin of Safety
|Share Price||Margin of Safety|
Disclosure: I am long MSFT.