July 28, 2010
Right now, you can't go through a list of news articles for Research In Motion (Nasdaq: RIMM ) without seeing gloomy headlines such as "Why RIM is a Risky Investment" (TheStreet.com) and "BlackBerry's Era May Be Ending" (The New York Times). Fears of market share declines because of Apple's (Nasdaq: AAPL ) iPhone and Google's (Nasdaq: GOOG ) Android platform clearly have investors on edge -- and an underwhelming earnings report last quarter didn't do much to calm their nerves.
But the tech sector's history features many companies that thrived long after predictions were made of their imminent doom. Is RIM one of those names, or are Apple and Google on the verge of deep-sixing the Canadian giant? Here's a list of reasons to either buy, sell, or hold onto RIM's shares:
- International growth: In spite of heated competition, RIM's international business is still booming. Last quarter, 45% of RIM's revenue came from countries other than the U.S. and Canada, up from a mere 30% in the year-ago period. RIM has gained smartphone market share at Nokia's (NYSE: NOK ) expense in Western Europe, and is growing like wildfire in Latin America. Furthermore, with Gartner expecting the value of the global smartphone market to grow at a 28% compound annual rate from 2009 to 2014, RIM could post decent growth even with a modest drop in market share.
- Customer loyalty: Corporate IT departments still swear by RIM's BlackBerrys. When it comes to enterprise features such as data access, security, and device management, RIM remains the best in the business. Apple, while having made improvements, still isn't at RIM's level in this regard, and Google is nowhere close. Likewise, there are still a lot of email and text messaging-addicted retail users out there who won't give up their BlackBerrys until you pry them from their cold, dead thumbs.
- Superior data efficiency: Whereas email and traffic sent to iPhones and Android devices comes straight from the source, traffic sent to BlackBerrys is routed through RIM's Network Operations Centers (NOCs), which compress the data. This reduces the data load on wireless networks, giving the likes of AT&T (NYSE: T ) and Verizon (NYSE: VZ ) a big incentive to continue promoting RIM's devices. In addition, RIM's technology can produce lower data charges for users who don't have unlimited data plans.
- Tempting Valuation: After years of trading at premium multiples, RIM's shares are now available at an enterprise value (market cap minus net cash and investments) that's only 8.5 times its estimated earnings for this fiscal year (which ends February 2011). And this discounted valuation is being given at a time when RIM is still posting annual revenue growth that's comfortably in the 20s.
- Apple, Google, Apple, Google ... : There's no dancing around it: RIM still hasn't released a touchscreen smartphone that appeals to consumers the way that either the iPhone or Motorola (NYSE: MOT ) , HTC, and Samsung's Android models have. Relative to expectations, the BlackBerry Storm line has been a dud. The success of the iPhone and Android has caused RIM's North American smartphone share to sink over the last year, and I suspect it's not done dropping -- especially with cheaper Android models on the way.
- Falling ASPs: Though RIM has kept its global smartphone share fairly steady, it's done so at the cost of a major decline in the average selling price (ASP) of its phones. Last quarter, RIM's ASP fell another $12 to $299, barely half of the $595 ASP reported by Apple for the iPhone. These ASP declines have meant that RIM's revenue growth hasn't kept pace with phone shipment growth. And unless RIM does a better job of competing on the high-end, I see that trend continuing.
- Margin pressure: RIM has done an admirable job of keeping its operating profit margin fairly steady in the face of ASP declines. But with the company forecasting gross margin declines in the coming quarters, it will be hard-pressed to prevent its operating margin from falling in tandem.
- RIM's Product Roadmap: The next version of RIM's BlackBerry operating system, BlackBerry 6, should deliver major improvements in both the web-browsing and multimedia capabilities of RIM's phones. In addition, signs point to an August release of the Blackberry Bold 9800, a device that combines BlackBerry 6 with a touchscreen and a slide-out keyboard. I can see the 9800 delivering a much better touchscreen experience than what RIM currently offers. But even if it does, the iPhone and Android will still have a huge lead in available apps, and that will likely be a deal-breaker for many consumers.
- Capex needs: Given the cost of supporting its NOC infrastructure, RIM's capital expenditures during fiscal 2010 (ended in February) exceeded $1 billion. Capex more than doubled in fiscal 2009, and there's always the risk of another major spike happening on account of RIM's NOCs witnessing a surge in data traffic. But for now, the company's capex growth has moderated, and is actually trailing revenue growth.
If RIM was still trading above $70 the way it was in April, I'd probably pass. At $53, however, the valuation puts it in the "buy" category.
RIM's outlook is definitely cloudier than it appeared a couple of years ago, and its days as a Nasdaq highflier are probably over. But the market is pricing the company as if the sky is about to fall on its head. Between its competitive strengths and a smartphone market that has plenty of growth left, I think RIM still has enough going for it to keep that from happening.
Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Nokia is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers selection. Apple is a Motley Fool Stock Advisor pick. The Fool owns shares of Google. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.