Blinded by Flash: RIM's Excellent Results, All Eyes on Apple

Last week investors were treated to good news on several fronts. US macroeconomic data published on Friday showed that consumers spent more than expected in November, with personal spending up 1.1% (a threefold increase over October) against the projected 0.7%. The November increase is a high second only to the 1.2% increase for May 2004, and there are those who now believe we will see a significant slowdown in December, as consumers realize their homes will not continue be a money machine as they have been in recent years.

On the microeconomic front, with Oracle Corp.'s (ORCL) surprise already history, last Thursday it was the blackberry handset company, Research In Motion Ltd. (RIMM)'s turn , which reported a doubling of its quarterly profit to $0.65 from $0.32 in the same period last year, with sales coming in at $1.67 billion. The company's guidance for the February quarter was only slightly higher than the analysts' consensus estimate, but against prevailing worries about an impending recession and ongoing banking crisis that was all it took to send its share soaring by 11%.

Research In Motion shipped 3.9 million new handsets worth an average of $342 each in November, an annualized increase of 116%, and added 1.65 million new subscribers in the quarter ending November. This, it will be recalled, was an exceptionally tough quarter for the financial sector, one of the largest of RIM's enterprise customers. The increase in subscribers reached an annualized 89%, and it turns out that half the new customers in the quarter were from the consumer sector, a figure which was quite a surprise, considering that the device's principal competitor is the Apple Inc. (AAPL) iPhone.

For Bear Stearns analyst Andrew Neff, there has been only one stock out of the ones in the electronic sector he rates "Buy" and which he described as "hyper-growth" and that was Apple. Following RIM's fantastic results, he has raised his rating for the company to "Outperform" from "Peer Perform" and set a target range for 2008 of $150-170. He now sees it as another "hyper-growth" stock for the long-term.

Neff is excited by the fact that RIM has managed to penetrate the consumer sector. "We think anxiety over economic concerns and potential slowdown in US enterprise spending is overstated in view of the secular phenomenon of smart phones," he writes. Neff notes that the company extended its penetration by cutting data supply prices, as well as improving the quality and design of its handsets. In addition to expanding its range of applications, including new launches likely in May 2008, Neff says RIM is now marketing its products in 130 countries, and has now added the mega markets in China and India to its global reach.

Neff stresses in his note to investors that the competition on the market is not between RIM and its Blackberry, and Apple and its iPhone but rather, one between smart handsets and ordinary ones, and believes the world is moving toward smart handsets.

I had occasion to discuss this over the phone with SanDisk Corporation (SNDK) CEO Dr. Eli Harari while he was in Israel two weeks ago to celebrate the first anniversary of the merger with M-Systems, whose team he never ceases to praise. In answer to my question about what was new on the market he said,"There is an earthquake taking place - that no one is aware of yet - because of the iPhone. Everybody wants to do the same thing, and with a good many flash chips in the process." We know more about this earthquake after RIM, and now all eyes are trained firmly on Apple, which will announce its own results in January.

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Comments

[Tom B:]

Dump RIMM while you can; consumers are UNLIKELY to stick with RIMM as news about the iPhone spreads. RIMM will have to differentiate by price-- how could it be otherwise? That means LOW MARGIN.

2007 Dec 26 09:14 AM

[John Lazerow:]

"RIMM will have to differentiate by price-- how could it be otherwise?" What a dumb comment - another in a long string of anti-RIM commentary from this guy. How about differentiating by offering true push email/data and being the only "quality of service" provider for data delivery. There is no other service offering that matches what RIM has - how can you not see that?

I love my iPhone, I love my Blackberry. But when I switch from the BB to the iPhone, the data experience doesn't match. Yes, I get an awesome web browser, sweet media player, and cool interface but I don't get instant emails delivered. Anyone who want core communication first and not media will stay with BB.

Regardless, to say one will be dead and the other will prosper is simply ignorant. What the article is really saying, and you should listen Mr. Barta, is that the entire market for all smartphones is growing dramatically. That means there is plenty of business to go around and a number of players can be successful in such a high unit volume market.

2007 Dec 26 11:09 AM

[Stefan Wyler:]

There's plenty of room to growth for both Apple and Research in Motion in the smartphone market. However, I don't see Motorola, Palm or Nokia competing with them in the upper price range.

2007 Dec 26 11:26 AM

[Jeff from O...:]

Is there even a push model in the consumer space?
If not then push is moot in this article. If there is then Apple is probably working on adding this for Version 2 along with 3G or 4G data.

2007 Dec 26 11:39 AM

[jonesy:]

The big question regarding RIMM is how will they continue to innovate and differentiate as many vendors are coming into this space (not just Apple). As the smart handset market grows, will RIMM be the Apple in the early 90s in the computer market? Or will RIMM be the Apple in the early 00s in the MP3 market?

Can they defend and grow their position? Do they hold "push email" patents such that the end result is that others cannot provide a comparable quality service to handset owners? Do they have scale so they can have reasonable prices AND good margins/profits, and get better deals on product components compared to competitors? Do they have brand stickiness so that even if others come, consumers will still choose them for their next handset? I haven't done as much research as others (I don't own RIMM), but I see them more like the Apple of the 90s.

2007 Dec 26 12:00 PM

[KPO'M:]

(FD: I own some Nokia stock)
Stefan, Nokia already occupies a large segment of the high-end smartphone market in Europe, and they have brought over some of those devices to the US, so your comment about them not being able to compete with RIM and Apple on the high-end is perhaps short-sighted. They have a big R&D budget, and are probably best-equipped of the handset manufacturers to compete with Apple on a feature-by-feature basis. RIM does have better carrier relationships, however.

2007 Dec 26 12:29 PM

[Tom B:]

"How about differentiating by offering true push email/data and being the only "quality of service" provider for data delivery."

You've got odd requirements. I have no need for "push" anything; when I need something, I go for it myself. But, to each is own.

2007 Dec 26 04:34 PM

[John Lazerow:]

This response clearly demonstrates why you have no understanding of RIM's value proposition and continued discussion is fruitless. I'll no longer post responses to your dribble. By the way, I am a long term holder of both Apple and RIM and both will succeed in selling a ton of smartphones over the next few years. It will be interesting to see which stock performs better. Good luck.

2007 Dec 28 10:33 AM