Research in Motion Pays Up for Growth

Research In Motion (RIMM) shares are sharply lower this morning after the Blackberry maker last night reported a slight earnings disappointment for the fiscal first quarter ended in May, and projected much higher than expected operating expenses in the August quarter. A combination of higher marketing expenses to support a wave of new product introductions and rising component costs will combine to pressure margins.

The analyst reaction to the results was mixed; more than a few advise buying the stock on today’s slide. Here’s a rundown on some of the Street’s commentary on the stock this morning. We’ll start with the bears:

Bears:

• Samuel Wilson, JMP Securities: He downgraded the stock to Market Perform from Market Outperform, citing a “disappointing” May quarter, the fact that the company appears to be “gearing up for a war with Apple,” and a perception that “RIMM will no longer be viewed as a safe stock and could witness multiple compression in the short term.” His FY ‘09 EPS estimate drops to $3.70, from $3.85.
• Richard Windsor, Nomura: He sees two factors at work. One, “the market is becoming more competitive and so marketing needs to increase.” And two, “to continue growing, RIMM needs to increase the range of devices that it is offering. Without a flexible platform, this requires stepwise increases in development expenses leading to the lack of operating leverage.”
• Charlie Wolf, Needham: Repeats Hold rating. “In contrast with management’s view, we believe growing competition in the consumer market poses a risk to Blackberry’s supercharged growth in this market,” he writes. Wolf notes that “the now competitively priced iPhone will launch shortly with consumer applications Blackberry has no hope of matching.”
• T. Michael Walkley, Piper Jaffray: Repeats Neutral rating, cuts price target to $146, from $156.

Bulls:

• Peter Misek, Canaccord Adams: Repeats Buy rating, and raised target to $225, from $200. “We recommend that investors use any weakness as an opportunity to add to their positions.” He sees the company ’s growth propelled by more than six new device launches in the next 12-18 months.
• James Faucette, Pacific Crest: He repeated his Outperform rating and upped his target to $165, from $135. But he does say that the increase in operating expenses is likely to be more than a temporary phenomenon, “as the company pursue accelerating market-share gains in new geographies.”
• Rob Sanderson, American Technology Research: He repeated his Buy rating and $205 price target. “Investors hoping for a pull-back should not wait long; this may be the best chance left this year to buy weakness int he best growth story in large-cap tech,” he writes. “RIMM remains a must-own stock for growth managers.” He notes that “the number of technology stocks with over $1 billion in quarterly sales that are growing in the triple digits is one.”
• Jeffrey Fan, UBS: He repeated his Buy rating. “While we are somewhat surprised by the magnitude of the opex spend, we believe management is confident in its near term prospects and is investing to capitalize on future top line growth with the potential for operating margin expansion.”
• Blaine Carroll, FTN Midwest: Repeats Buy rating. “Although we are disappointed by the miss during Q1 and the EPS revision going forward, we understand that this is the time to invest in the business, both from a product development view and brand awareness.”
• Jeff Kvaal, Lehman: Repeats Overweight rating and $165 target. Kvaal writes that he is optimistic that higher growth will “ultimately offset the higher near-term opex.”
• Jim Suva, Citigroup: Repeats Buy rating, but trims target to $160 from $165. “RIMM made the tough decision to forego short term profit for longer term growth.”
• Mike Abramsky, RBC Capital: Repeats Outperform rating and $165 target. He contends that the investments are “a massively bullish leading indicator,” and asserts that the company is the best positioned in its history.
• Simona Jankowski, Goldman Sachs: Repeats Buy rating, with $156 price target, down from $163. She still likes the stock but advises waiting for the dust to settle. “We now think RIMM’s EPS growth will be based on higher sales and lower margins relative to our prior expectations, as the company takes aggressive actions to respond to the iPhone’s lower price points and Nokia’s move of the Symbian OS to an open-source, royalty-free model.”

RIMM today is off $17.61, or 12.4%, to $124.73.

Comments

[Kevin O]

First of all, this drop in RIMM should tell most of us that there are real concerns about this market. Its obvious RIMM has spent a lot in advertising, etc., but this drop is ridiculous. Read the conference call, and to me it isn't that disappointing at all. A company growing like this needs to take all precautions to ensure its place in the marketplace, especially in light of many other carriers promoting their own cell phones to compete with RIMM. This is a buy and steal at this price. Wait and see.

[bryanz]

84c this Q vs 39c same Q last year. I wonder how many times before earnings the estimates were raised? My favorite quote: “the number of technology stocks with over $1 billion in quarterly sales that are growing in the triple digits is one.”

I think the future is still very bright for both RIMM and AAPL.