How Are Apple and RIM Moving Up?; Sandisk's Flash of the Future

Remember the top four tech and Internet stocks of 2007? Research In Motion Ltd. (RIMM) climbed 166% over the year, Amazon.com Inc. (AMZN) rose by 134%, Apple Inc. (AAPL) gained 133%, and Google Inc. (GOOG) added 50%. They have all taken a tumble since the start of 2008, with Apple sliding 40%, the worst return out of the four, and way in excess of the Nasdaq's own negative 13.2% return since the beginning of January.

Of the four, Research In Motion will probably the first to swing back to a positive return for the year, a development that could perhaps herald a rebound in the tech sector as whole. Research In Motion gained 14% over last week, narrowing its negative return since the start of the new year, and as of Monday morning its return stood at just under minus 5%.

Most of last week's gain was seen on Thursday, when the company surprised the market with an upbeat warning that its subscriber base at the end of its fourth quarter, ending in February, will be between 15% to 20% higher than the figure in its guidance at the close of the preceding quarter.

The collapse in share prices in the tech sector since the start of 2008 was triggered by macroeconomic factors, in other words, a collapse in all the markets driven by a fear of a global recession, and a fall in consumption that could pummel profits. Looking at individual cases, the bears could point to specific troubles at each firm.

In the case of Research In Motion Ltd. it will be recalled, the consensus among the prophets of doom was that given its reliance on subscribers in the business sector, which is about to offload tens of thousands of employees all owning its Blackberry handheld device, the company should have forecasted a sharp drop in its subscriber base in its guidance.

Research In Motion Ltd., it now appears, is far less dependent on the business sector than was thought and is also far less dependent than was thought on the North American market now sliding into recession. The company will end its fiscal year this week with 14.3 million subscribers, of which more than two million were added in the fourth quarter alone, in which it shipped 4.3 million new handsets to new and existing subscribers.

Research In Motion Ltd. is continuing to expand in Western Europe and it is seeing strong growth in South America. It is also seeing strong growth in Russia and Eastern Europe, markets to which it is relatively new. It launched the new Blackberry 8700 handset in China at the beginning of 2008, a move that has increased its subscriber base there. In Japan, too, the country's largest cellular operator NTT DoCoMo, (DCM) has managed to increase the number of its Blackberry users.

The full extent of the harm caused to Research In Motion Ltd. by the shrinking banking sector will only be revealed when the company issues its full-year guidance and unveils its results on April 2. It may well be that the company's reassurances in its last report two months ago were appropriate at that time, and that there could still be a certain degree of harm in the upcoming quarters.

Who cares about price?

After the surprise from Research In Motion Ltd, I am expecting a similar development from another of the big four in 2007 - Apple, if only because the sentiment about it has been so negative of late. The forecasts about Apple have been so bearish that one might be forgiven for thinking that its product line is perhaps one of the worst on the market at present, while in reality the situation is quite the opposite.

I believe that out of all the leading telephony and computer companies, Apple is the least vulnerable to the recession, because it targets from the outset a user segment for whom price is immaterial. So if the sector leader, Hewlett Packard Co. (HPQ) is thriving, as we reported last week, it would be somewhat far fetched to assume that Apple, the Mercedes of the industry with a very small market share, is experiencing a slowdown.

In addition, I have never heard so resounding a chorus of praise about a handset as I have about the iPhone, including from top-rate professionals. With this in mind, many people will be wondering how it is that a year on from the announcement and six months after the launch, there is not one handset on the market which comes even close to Apple's iPhone, especially when it comes to easy Internet access, an application which is increasingly becoming the most essential function on any handset today.

A flash of the future

SanDisk Corporation (SNDK) held its analyst conference Monday at its offices in California. Last year's conference was a somewhat grim event, coming just days after the company unveiled an emergency program that included job losses and drastic cuts in expenditure, including executive pay, because of the slump the flash chip market was experiencing at the time.

SanDisk's share, paradoxically, is now down 30% on the low it reached on its last analysts day, even though the company has long since overcome the crisis of a year ago and even issued an official announcement to that effect. The current low has been caused by a number of reasons. Flash prices have again tumbled to the low point they were at last year, and the company's guidance for the first quarter was lower than what the market had been hoping for. Notwithstanding the above, there is, I feel, one dark cloud hovering over the stock and it is related to its competitor - Samsung Electronics Co. Ltd. [KSX:5930].

In August 2009, the royalties contract between the two companies will end, and as long as investors don't get any reassurances about the likelihood of it being renewed, the share will continue to struggle. Logic would dictate that there is no reason why it shouldn't be renewed, even in a reduced format, since considering that Samsung has now been paying royalties on the patents for a number of years, it cannot abruptly drop them as long as they are valid, and it is known that they are valid for many more years to come.

Whether the two companies are negotiating about the extension of their agreement beyond 2009 is as yet unknown, although SanDisk has been hinting indirectly that Samsung would stand to gain by this. One such example came last week in the form of an announcement by Toshiba (TOSBF.PK), carried by "Bloomberg", of plans to collaborate with SanDisk in the building of two more chip factories in Japan. The announcement quoted Toshiba president Atsutoshi Nishida as saying that the new factories, which would be ready to begin operating from 2010, will "also function as facilities to develop a memory chip that will succeed flash," although Nishida did not elaborate on this. SanDisk has apparently signaled by this that it has a road map in flash beyond the current generation of technologies as well, and that Samsung would do well to join the bandwagon.

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

[tom1234:]

mr. Shlomi Cohen---wow finally a person with 20/20 sight--great expression of facts in your analysis of appl--i am so tired of reading about the negativity/unreal conclusions by these effete snobs called analysts who can slam the Job's estamate of iphone sales by the end of 08 before aapl sold one iphone--then state that Job's low balls all estamates-- let me say again i could not agree more with your article

2008 Feb 27 08:30 AM

[xStatProf:]

Thanks Mr. Cohen for the insights in your interesting article. There's just one issue, though, where you seem to have an opinion not shared by most, namely iPhone. It's continued inability to run 3rd party apps, battery replacement plan, and total lack of hardware button navigation (not to mention price) make it 2nd to the HTC Touch, Sprint Touch by HTC, Alltel Touch by HTC, and coming soon, the Verizon Touch by HTC. Look at what CNN has to say, here:
tinyurl.com/2cxwaj

2008 Feb 27 08:41 AM

[Sepod:]

Cats & dogs are living together, and in other news Steve Jobs has, via Apple's 'Hot News' page, announced that Apple will, FINALLY, support third-party development of native applications for the iPhone. From APPLE .... "We are very excited about creating a vibrant third party developer community around the iPhone and enabling hundreds of new applications for our users," but they are taking the time to do it properly "because we're trying to do two diametrically opposed things at once -- provide an advanced and open platform to developers while at the same time protect iPhone users from viruses, malware, privacy attacks, etc."

2008 Feb 27 08:53 AM

[jcrash:]

Hey, xstat, Apple hasn't had the "best" MP3 player in a long time, but that hasn't stopped them from selling 10x more than anyone else. It isn't always about which one is best...took me a while (and a few dollars) to figure that one out.

2008 Feb 27 09:48 AM

[Tom B:]

"Hey, xstat, Apple hasn't had the "best" MP3 player in a long time,"

I'm sure you can get more Gigs storage/dollar from Zen or somebody, but no one else has anything like the Touch, and, even with the "classic" iPods, Zen and Zune can't come close to matching the "user experience" (iTunes store, etc).

2008 Feb 27 10:52 AM

[billy bob:]

Shlomi

Nice comments, but you seem to be ignoring Valuation, is 1999 back?

Why no comments on valuation? There is a difference between a good company, a good product and a Good Stock. Remember Cisco (and many other great companies) in 1999-2000 analysts thought it would double, but instead it dropped 80% and never came back-Bubble Valuation like RIM.

RIM presently has sales of $5 bn, a Valuation of $62 bn, valued at over 12 times annual sales and p/e ratio 58.

Even if sales double (doubtful) to $10 bn and profits double the stock will still be overvalued. Sales for the next Qtr are only projected to increase $200ml, a long way from a double.

2008 Feb 27 02:51 PM

[daffy:]

Barta,

You forget that there is a plethora of people who don't like the touch. I hate it. I wrote 8 "I apologize" emails after I gave ipods for Christmas one year. iTunes has to be the worst artery cloggin prohgram right behind Norton. The whole experience is fine for the minds that are attracted to such folly. It just happens to be that folly is all it is. Have you seen the overall Market Share of MicroSoft vs. Apple lately? I'm glad to see that apple has kept their little enclave alive, it gives me great fodder for when I feel like picking on someone.

I do hope AAPL continues to plummet relentlessly. There is nothing I would like more than to see the freaks beocme more freakish. The iPhone is a flop. Poorly hatched Ok idea is all it was. Another passe attempt at avant garde.

Just remember, it is kind of gross to be fondling your electronics in public.

Sorry, but you few asked for it.

2008 Feb 28 06:03 PM