Research in Motion's Bad News May Be Very Good for Investors

Wednesday, after the market’s close, Blackberry-maker Research in Motion (RIMM) released earnings that narrowly missed guidance for both revenues and earnings per share [EPS]. Having never come up short before, and consistently out-performed, Wall Street expected more from RIM. The stock traded down heavily after hours. Thursday, the market showed no mercy. Sometimes though, bad news is actually good news. Perspective is everything.

By the numbers, RIM reported revenue of $2.24b and earnings of 84 cents a share. While that fell short of the expectations for $2.7b and 85 cents, the revenue was up 107% year over year. Profits, at $482.5m, were more than double last year’s $232.2m too.

So why the missed targets? In a word: growth. As Warren Buffet has said in the past, “investing is laying out money today to receive more money tomorrow.” And that’s what RIM appears to be trying to do.

To the bigger picture: the smartphone market is growing aggressively. This summer RIM will sell the 40 millionth Blackberry. By segment, consumers are becoming a big part of the originally business-centric product’s success.  Currently consumers account for 60% of the quarter’s sales. They also account for 40% of RIM’s customer base.

Capturing consumers, however, can be costly. RIM is spending to do that. They’re spending on marketing and product development. On the quarter, sales and marketing expenses increased by nearly 84%. It’s a forward-looking plan with one intent: powering growth.

In market share, RIM presently has about 13% of the global smartphone market.  That’s well behind market leader Nokia (NOK), but well ahead of Apple (AAPL) (via Gartner). But Apple has come on strong in just one year of sales and is poised to push even harder. Without a doubt, though RIM downplayed it in their conference call, they’re gearing up to fight. Apple’s soon-to-be-released iPhone 3G, priced at $199 a phone, is going to be a more aggressive competitor than the first generation.   

Looking ahead to the slow summer quarter, RIM is projecting revenues of between $2.55b and 2.65b. That’s ahead of consensus expectations ($2.44b). The profit margin will continue to see some pressure from the increased spending, however.

So the margins are down but they’re hardly bad. Revenues are up. Market share is rising. The bad news of missed expectations may actually be good news.

Many analysts seem to think the current announcement and subsequent sell off will create a buying opportunity. That is a point that can be debated given the general economy and the competitive landscape, but if you were someone who believed RIM was in good shape prior to this earning announcement, even with the missed numbers, there appears little reason to reconsider. 

Comments

[phdinsuntanning]

PE: 54.60 , you will wait 54 years to get your money back,
no thanks, just short and use apple phone or Nokia ephones

[docmike]

RIMM appears significantly overvalued compared with apple and HUGELY overvalued compared with Nokia, using metrics such as P/E and EV/EBITDA. Apple has no debt; RIMM and NOKIA have low debt/equity ratio. Nokia is a market leader and looks like a buy to me. RIMM looks like a short, AAPL looks like a watch or hold.

Disclosure: no position RIMM, NOK or AAPL.

[.crazylegs..]

appearances can be deceiving...management at RIM has been great over the last several years. You've made a lot of money betting on them. Now they are saying they want to invest to scale up for the next leg of growth. Seems like a smart move. As the CEO said it, the center of the mkt is being hollowed out and you have low end phones on one side and high end, platform connected phones on the other side. Interesting comment - but one that plays well to iPhone and Blackberry.