Despite Drop, RIMM's Valuation Still Too High

Research In Motion (RIMM) has seen its shares drop almost 25% from its recent highs, yet there is still plenty of potential for further price decimation as RIMM's market cap of nearly $64 billion is simply not justified. They are not the only game in town, now that Apple's (AAPL) iPhone is challenging them for market share in the corporate segment.

Expectations on the high side: The company is expected to earn $3.79 per share on revenues of $10.9 billion in 2009 and then grow its earnings another 42% in 2010 to $5.37. That is certainly a tall order considering its growth rate will be slowing simply due to "the law of larger numbers" (as you get larger it becomes more difficult to grow because your comparables keep rising). For example, second quarter earnings growth from a sequential basis is expected to produce only a 14% earnings expansion.

Market cap exceeds six major US food producers combined: RIMM's staggering market cap of $64 billion is higher than Kellogg's, Tyson's, Hormel's, Con Agra's, Campbell Soup's and Sara Lee's combined, yet these food titans produce annual revenues totaling $66 billion versus RIMM's $11 billion. Greed and momentum seem to be driving its share price, while the fundamentals take a back seat. It appears reminiscent of the Nasdaq just prior to its 2000 meltdown. Don't we ever learn from the past?

Lack of transparency: Since RIMM is a foreign company, it is not required to file financial forms or documentation with the SEC. How do you then verify what the company's insiders are doing with their shares (are they selling or buying)? There are no 10Qs or 10Ks to evaluate. You are essentially investing in the dark on this one.

Potential pitfalls: One of the company's largest revenue bases is its financial customers and since that market is currently in downsizing mode, that sector will obviously be in need for less blackberries (2) AAPL will begin to take market share (3) Patent and technology challenges will continue to linger.

First quarter debacle and analyst take: After last month's disappointing first quarter results, analysts have begun to sour. Out of their last five actions, three have been negative and two neutral. The shares seem to be trading on the "greater fool theory" as their "meteoric" rise appears closer to a pyramid or ponzi scheme. Momentum traders and speculator's falling for unrealistic, "$200 one year analyst price targets" have been significant drivers of the share price. Fear and greed dominate the markets and when RIMM eventually stumbles it could get ugly quick, because fear always has more impact on a stock's demise than elation has on its rise.

Bottom line: RIMM is an exciting and glamorous stock to own, but it's just too risky to hold at this juncture. Playing this stock is akin to gambling at the casino. The shares could easily fall another 20% before a recovery mode takes place. If I had to do anything, I would be inclined to be on the short side since the trend has been down, and the trend is your friend.

Disclosure: None

Comments

[meh:]

another pointless article, other stocks arent any better... including apple,

2008 Jul 29 09:38 AM

[.crazylegs..:]

WOW! This article misses on many fronts:
1. High expectations: 14% sequential growth is HUGE (that would mean 68% annual growth if that continued each quarter for a year). It's priced at a discount to its growth and the opportunity ahead of them is gigantic.
2. Food companies? Yeah, that's a fair comparison.
3. Transparency? How about the 6K that I read. You know, the one they file with the SEC after each quarter.
4. Pitfalls? Finance represents about 13% of the company's users and that is falling each quarter. Not a large impact. And if you think any bank will adopt the activesync protocol and accept incoming pings from devices (which requires opening their firewalls), you aren't paying attention. Patent fights are part of the business and always present a risk to any company.

I can't say whether the stock might be down "20%" in the near future, but you simply can't ignore the fundamental opportunity ahead as mobile phone users adopt "smarter", connected platform devices. Combine that with RIM's push to have carriers offer low cost BB plans, and you'll see how the economic principle of elasticity of demand for data services propels the company's revenues and earnings significantly higher over the coming years.

2008 Jul 29 11:01 AM

[G Chubbs:]

Every once in a while I have a doubt or two about my investment methodology and then I will read an article like this and feel much, much better about myself. Couldn't agree more with Crazylegs assessment. RIMM compared to food companies ... that will be a fair comparison when you start to see people carrying around chicken noodle soup and corn flakes with them and freaking out when they leave the house without it.

2008 Jul 29 01:01 PM

[Jewbacca:]

Finally, someone with enough balls to call it the way it is. Pete at CanaFraud Adam is getting super desperate. Upgrade, Upgrade to 225.00. Product replacment, hahah. I think people are more concern about keeping their jobs and putting food on the table then a new phone.

You got idiots that think tech valuations should be higher than food stocks, they need to go back to stock trading 101 instead of watching pump bubble-CNBC.

I see it to many times during the tech bubble. People need this, you have to have this, companies have to use this..bha bla,bla. In the end, they lose their assss off when their favorite tech darling goes into the crapper.

2008 Jul 29 01:44 PM

[Network Effect:]

I agree with you Mark. The sense that I get is that RIMM is losing and there are a lot of longs in the momentum group looking for an uptick to unwind. Not to say that RIMM's sales will plummet, but I think the picture will become clearer to everybody over the next couple months that RIMM is not on a par with Apple and will be passed soon. Although Apple's technology is "cool", it's really the ecosystem around the iPhone that will differentiate it and create a moat around it ala eBay, Microsoft, PayPal and various other networks. The switching costs away from the iPhone will become higher and higher as more and more companies tie in - these things are like snowballs rolling down a hill - the bigger they get, the harder it is to stop it rolling down the hill. So, it appears to me that the momentum guys that are long RIMM are jumping on the lack of clear data at this point in the game to get one last uptick before they unwind. Time will tell. Fast Money keeps running spoof ads of hearing the sounds of crickets outside of a PALM Centro launch. It will be interesting to see if there are any lines for the BBerry Bold. I would not be surprised if the 5 hour lines outside of Apple's stores 2+ weeks after launch might be the delay in the Bold. However, RIMM is a great company so they may come up with something that changes the game a bit. But it's also possible that the Kindle will catch on too - I just don't think that it's going to happen.

2008 Jul 29 01:45 PM

[holdthephone:]

I think that the author is taking a short term approach and ignoring many factors that will influence growth. One that comes to mind is the rest of the world! Much of RIM's growth is coming from outside of North America, and this will only continue into the future as huge markets in Latin America, Asia, and Africa continue to adopt mobile email. I dont see the iPhone becoming a huge corporate tool in the US, and especially not overseas. Sell my RIMM? I think not.

2008 Jul 30 10:03 AM

[User 234737:]

I can see Krieger's confusion. Blackberries, Apples, and Food companies. Yup, let's lump them together in the same basket, as any good analyst would. If RIMM's market cap of 66B exceeds that of 6 major food companies combined, then APPLE's market cap of 141B exceeds that of at least 12 major food companies combined. Those booming food companies are sure causing a lot of comparison headaches!

2008 Jul 30 10:54 AM

[Randy Fay:]

Although the analysis is not exactly spot on, I have to agree that the share price could easily drop 20%. An interesting paired trade would be short RIMM/long AAPL

2008 Jul 30 11:52 AM

[ButtFullOfPoo:]

Mark, hop back on your meds and come up with some more educated reasons why additional price decreases should fundamentally happen. If you're going to re-write what's been spat out extensively ever since RIMM's been in the stock spotlight, then atleast do so in a more informed manner. "Playing this stock is akin to gambling at the casino." ?? Go back to night school and re-deploy yourself, and your old zingers, at TMZ.com

Annoyed I clicked on this article link,
ButtFullOfPoo

2008 Jul 30 01:34 PM

[Carousel:]

One worry [for me] is that RIMM seems to be a one trick pony. Am I missing something? Apple and other companies strive to have a wide product base with revenue streams that differ yet complement the other(s). I know RIMM has server side products that support the phones, but again its a single product line. Apple has computers of all ilk's and then iPods, now iPhone, Apple TV (if its really a product;) and all the software to back these up (the OS, the applications, the web services, iTunes, etc). Also, isn't a P/E of 45 kind of of high (for even a supposed growth stock like RIMM)? People were freaking when Apple was at 200 and a similar P/E, so now [Apple] at a P/E closer to 30 which stock has the better potential for growth?

2008 Jul 31 01:47 PM

[Carousel:]

One worry [for me] is that RIMM seems to be a one trick pony. Am I missing something? Apple and other companies strive to have a wide product base with revenue streams that differ yet complement the other(s). I know RIMM has server side products that support the phones, but again its a single product line. Apple has computers of all ilk's and then iPods, now iPhone, Apple TV (if its really a product;) and all the software to back these up (the OS, the applications, the web services, iTunes, etc). Also, isn't a P/E of 45 kind of of high (for even a supposed growth stock like RIMM)? People were freaking when Apple was at 200 and a similar P/E, so now [Apple] at a P/E closer to 30 which stock has the better potential for growth?

2008 Jul 31 01:47 PM

[$$$$MANAGER:]

Mark Krieger has no idea what he is talking about. Comparing food companies vs. tech. companies is basically apples vs. oranges YOU MORON. Companies in different sectors get different price/earnings ratios associated to the price of their stock based on the sector they belong in. Usually because of earnings growth going forward. RIMM is estimated to earn $3.81/share for the year ending February 2009 not $3.79.



I have been in investment banking all my career up until 4 years ago when I struck out on my own. Basically it works like this; once the second half of the year starts, analysts start giving their estimates on the stock price going forward. The general rule of thumb is that high growth companies in high growth industries such as tech. are considered too expensive once they reach a 40 multiple on forward earnings. RIMM is expected to earn $5.41/share for the year ending February 2010. 40 x $5.41/share equals $216.40. That is why the high estimate for RIMM's stock price is $225.00. The discrepancy is the difference the analyst with the high estimate expects the company to earn. RIMM's earnings growth is expected to increase 42% next year (2009 $3.81/share vs. 2010 $5.41/share) I believe that RIMM is a high growth company. Show me another company that can grow revenue 42% year/year in this economy. That is why there is nothing to worry about fundamentally speaking. What about the food companies that Mr. Krieger was comparing RIMM to? Kellog's expected earnings growth for next year is currently estimated for 9.3%. Hormel 8.9%. Con Agra 7.0%. Campbell's Soup 7.7% and Sara Lee 9.28%. Modest growth in a bad economy but far from stellar. That's why certain companies/sectors command a higher price/earnings multiple YOU MORON.



As for the fair price for the stock? You put a 40 multiple on current year's earnings before it looks pricey. For RIMM that would be 40 x $3.81/share and you get $152.40. That's if you believe the earnings estimates. Before RIMM's miss of a penny last month, it has consistently made or exceeded earnings estimates in at least the last 7 previous quarters. Also, if you beat earnings estimates, you add that amount to the current year's estimate and the stock can go even higher before reaching that 40 multiple because the estimates are just that, estimates. Once you exceed those you have to recalculate. So Mr. Krieger go back and leave this to the professionals before you start an unnecessary scare YOU MORON.

2008 Jul 31 07:33 PM

[d.t.:]

Well, call the author a moron and what not, if you like, but how about calling Warren Buffett or Benjamin Graham an idiot?
Value investing will beat the crap out of any "hot" stocks in the long run.
Of course, a few speculators will make out like bandits but the rest of so called "investors" (read "greedy ignorants") will be left holding the bag..
And they'll have no one to blame but themselves..

2008 Aug 01 09:17 AM

[techy:]

RIMM is expected to earn $5.41/share for the year ending February 2010

------------

yup, sure.. why not?? Blackberry is still the only smart phone in town...as it was the last two years.

hey how about earnings growth slows.....or maybe how about earnings stagnate after 2009??

oops...that will mean stock price goes to $50

2008 Aug 02 06:16 PM