Research in Slow Motion?

Company Research

After beginning the year going full steam ahead, rising an unbelievable 40% year to date, Blackberry maker Research in Motion (RIMM) is getting pounded today down more than 16%.  The stock dropped like a rock as (previous to the market open today) RIM announced that earnings for the fourth quarter would come in at the low range of estimates.  The company also expects revenue to come in at the mid point of the guided range.  This news was certainly a disappoint although RIM did affirm that net subscriber growth had been strong through the end of the year and into their fiscal 4th quarter.  Now, RIM estimates that net subscribers could be upwards of 20% greater than their previous forecast in mid December.

I wonder if the drop in the stock is not an overreaction to news that wasn’t all that bad, after all a company gives guidance in ranges for a reason.  We, at Ockham, have thought RIM was attractively valued since it dropped below $60 last fall.  So, we were not surprised to see the stock gaining momentum on the subscriber gains.  However, apparently the market rightly expected that these gains in subscribers would translate to an out-performance on earnings, revenues and margins.  Perhaps Blackberry is knowingly sacrificing margins to keep gaining subscribers because as any “Crackberry” user knows, once you have the mobile connectivity of these devices, it is awfully hard to give that up.  Blackberry’s are still the leader in corporate phone sales and that in not likely to change anytime soon.  However, who knows when the slowdown in business spending will reverse course.

This drop in RIM’s price presents a decent buying opportunity, as the company is continuing to grab market share in this extremely tough environment, especially as business are cutting back on all expenses.  The stock was fairly attractive before the drop off in Wednesday’s trading as price-to-cash flow was 9.98x, which is less than half of the RIM’s historical average.  The same was true of RIM’s price-to-sales which is currently only 2.06x, but in the last ten years RIM has normally ranged between 3.2x and 10.5x.  So, now that the price has dropped nearly 17% at the time of writing, these metrics are even more attractive.

RIM has found it necessary to cut quite a number of jobs in the downturn and it has to become leaner, but all the while, they keep getting their devices in the hands of consumers.  The lowering of expectations will make it that much easier to meet and exceed the Street’s estimates when quarterly earnings are released in April.  RIM is continuing to innovate its Blackberry line with new and different iterations of their phone and data devices, most recently offering touch screens and even a flip phone.  The competition between Blackberry’s and Apple’s iPhone (AAPL) will continue to rage on, but it seems that the companies facing real difficulty are the “old guard” phone companies (NOK, MOT) in catch-up mode.  As more and more people are enjoying their ultra-capable smart phones, the drop off in demand for simple phones will continue. 

Ockham Research Staff @ February 11, 2009

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