Research in Motion Knocked Down, Not Out

Research in Motion (RIMM) has already undergone a series of downgrades by major analysts after releasing earnings after the close yesterday. The results were bad but certainly not terrible as revenues narrowly missed consensus estimates of $2.6 billion, with actual results coming in at $2.58 billion. That is 15% better than last quarter and 88% better than one year ago. Earnings also came in one cent below estimates for the quarter. While the market generally does not like missing estimates, there is something more to this 27% drop in share price than just slight misses on revenue and earnings targets. The true blow to the company came when they lowered guidance going forward. For the third quarter — which is what we are currently in — RIMM lowered guidance to $.89 to $.97, while analysts had wanted $.98. The company expects component costs to continue to squeeze margins and put pressure on earnings and their projected gross margin fell from 50.7% to 47%.

Blackberries, which were quickly embraced by the business world, have gained in appeal for non-business consumers. This widespread appeal has yielded revenue and market share gains year after year. The growth in RIMM sales has been nothing short of spectacular, on a yearly basis since 2004 sales have grown an average of 79.5%. That is phenomenal growth and RIMM appears to be poised to be an industry leader in the smart phone market for the foreseeable future.

Technology stocks have taken quite a hit over the last year and appear to be undervalued, and thus we have an Undervalued rating on the cap weighted sector. Coming into the day, we had RIMM at a price of $97.53, which was deemed by our methodology to be Fairly Valued. However, after today’s huge reaction (some would say overreaction) we are starting to really like the potential of this growth story. For RIMM to trade at the low end of their historical range of Price-to-Sales and Price-to-Cash Flow, the stock would need to appreciate to $83. That is not a guarantee that it will quickly rebound to these prices by any means, but this logic comes from what the market has been willing to pay in the past.

So, do not be surprised, when our research ratings are refreshed for the upcoming week, that we will be upgrading RIMM on the price erosion that is disproportionate to the revised guidance. All the while, the company is chugging ahead selling, selling, selling Blackberries to executives and soccer moms alike. We at Ockham Research are always looking for stocks that have been unjustly battered down by an emotional market. Today’s market action has started to grow our interest in Research in Motion’s shares.

Comments

[chazzzzz:]

Historical ratios mean nothing in this market, As consumers scramble to cut expenses one of the first to go will be expensive data plans from the carriers. Newly laid off workers will no longer have a company-sponsored plans. Price cuts will ensue and margins will falter. The growth is probably over for now.

2008 Sep 26 07:42 PM

[trandall1991:]

In reality it's just panic mentality at work, creating a firesale price opportunity. As the CEO described it, RIMM is engaged in a land-grab in the wireless market, as all of its competitors are folding, incapable of competing with the Blackberry. The former corporate tool is going into the consumer mass-market with a vengance, and it's going to take down Palm, Motorola, Ericsson, and eventually Nokia, HTC, LG, Samsung, etc. as the consumer market converts from dumb phones to smartphones. Only AAPL is a serious competitor right now, coming at the market from the consumer side, while RIMM comes at it from the business side. They will collide in the middle, and everyone else will be squeezed out. RIMM's PEG is now close to 0.5. I'm all in.

2008 Sep 26 07:45 PM

[Caltorguy:]

I agree - I think RIMM and AAPL will end up in a sort of duopoly for high end data phones. The iPhone is great but they'll need to figure out some sort of data compression technology to get around the wireless capacity issues. Companies pay for wireless data so I have a tough time believing that they'll provide a multimedia device "iTunes enabled" for staff when they really just want them to be able to check email on the road.

2008 Sep 26 08:22 PM

[ido:]

There really isnt much research to support that spending on smartphones will decrease, if anything all arrows point to increased spending on smartphones, yes, even in this current economic crisis. RIMM has grown impressively over the past 4 years, but i think they have so much more room to grow when they penetrate international markets.

2008 Sep 27 10:20 AM

[RSAAKKS:]

When it was overvalued at 60x earnigs, we had fun. Now we need to overshoot on the other end, my target is $30 over next 1 year or so

2008 Sep 27 11:08 AM

[TECKBOB:]

RIMM IS A BUY AT THIS PRICE. IN 2009 IT WILL BE WELL OVER PAR.

2008 Sep 27 12:58 PM

[Duude:]

Hmmm...well this sucks! Looks like maybe sub 62 on the charts, Ouch! Double down?...or wait?.....shoot!

2008 Sep 27 04:23 PM

[mlc178:]

Everyone is concerned about margins. Here is a summary of gross margin information.

According to information gathered from the earnings call, gross margins are down due to new products designed for 3G. The new products also have more features and have higher component costs. The single-sourcing of the new components leads to higher margin costs. RIM will attempt to find a second source later. Products designed for the older platform such as Pearl Flip will have gross margins more in line with the Curve and Pearl. Overall, gross margins will fall to the mid 40 percent in 2009 as RIM transitions to more 3G phones.

2008 Sep 27 09:00 PM

[WJBinCT:]

You think quality communication is expensive in today's economic condition? Try less and let us know how it works for you. I'll stick with quality because it's worth the price.


On Sep 26 07:42 PM chazzzzz wrote:

> Historical ratios mean nothing in this market, As consumers scramble
> to cut expenses one of the first to go will be expensive data plans
> from the carriers. Newly laid off workers will no longer have a company-sponsored
> plans. Price cuts will ensue and margins will falter. The growth
> is probably over for now.

2008 Sep 29 01:31 AM