This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Analysts gone wild
All of a sudden, shares of Research In Motion (NASDAQ: BBRY  ) have become the hottest ticket on Wall Street. Off lows that approached $6 as recently as September, RIM has rocketed nearly three times in share price, and no wonder.

Last week, marquee analyst Jefferies penned a glowing note on RIM, giving the shares a buy rating and a $19.50 price target. As quoted on StreetInsider.com last week, Jefferies says RIM's new BlackBerry 10 operating system "will enable corporate email on Apple (NASDAQ: AAPL  ) iPhone and Google  (NASDAQ: GOOGL  ) Android devices." Yet according to Jefferies, "the market is unaware of this change, or may have been overlooking it."

Jefferies also loves the BB10 hardware, arguing that certain unnamed "carriers have agreed to volume commitments for the first two quarters post-launch," leading RIM to double, or even quadruple, its production plans to 2 million units per month. The analyst projects 2013 sales will come in in excess of 4 million devices sold per quarter, with the company selling as many as 51 million handsets over the course of the next 12 months. On the one hand, that's considerably fewer than the 125 million iPhones Apple sold last year, or the half-billion Android models shipped... but with RIM basically beginning from a standing start, 51 million BlackBerrys doesn't sound half-bad.

Other analysts are nearly as optimistic. Yesterday, Scotia Capital announced it, too, is upping its recommendation on RIM, this time to sector outperform (read: "buy"). Scotia sees existing users of BlackBerry devices producing 26.2 million in "upgrade" sales this year. (That's a number consistent with Jefferies' estimate that "RIM's installed base is about 20 million to 30 million in developed markets"). If the analysts are right about that, then Scotia's prediction of "29 million units" total, shipped this year, could be far off the mark... to the low side.

Reality check
But is Scotia right? Is Jefferies? I have to say that, much as I find the valuation on RIM shares appealing, not all the analysts' arguments make sense.

On the one hand, RIM shares at 3.5 times free cash flow (based on trailing-12-month results) look awfully tempting today. If that number's for real, and RIM can grow it by 10% per year over the next five years -- as the Wall Street consensus projects -- the stock looks like a steal. Analyst "earnings" estimates, with Scotia in particular projecting a $4.13 per share profit -- suggesting a forward P/E ratio of 4.3 -- are similarly attractive. (By way of comparison, Apple shares at nine times earnings look twice as expensive, and Google at 14 -- three times as pricey). 

However, RIM's CEO was quoted yesterday telling German daily Die Welt that he was considering selling the company's hardware operations on the one hand, and licensing its operating system on the other. And I have to wonder: Why do that, if BB10's going to be such a big success? To my mind, it just emphasizes a point that Jefferies made in its note, when the analyst estimated that BB10 has about a 30% chance of making a successful launch, while there's a 70% chance that BB10 fails, resulting in a worst-case scenario of the company going kaput, and a best-case scenario of RIM getting sold to another company at a share price lower than it fetches today. (A so-called "takeunder").

What's more, if RIM's really contemplating such a move, an investor has to wonder: After you license out your software, and sell your hardware... what's left to call "Research In Motion?" When you buy a share of RIM today, do you really know what you're going to end up owning tomorrow?

And one final thing: 51 million handset sales is a pretty high bar Jefferies is setting for RIM, considering the company's losing market share, and in contrast to Nokia (NYSE: NOK  ) , whose Lumia launch is well under way already, hasn't actually sold any BB10 devices yet. (Also considering that RIM seems to be undermining the very reason for buying the devices in the first place, by letting buyers of iPhone and Android use its previously proprietary email service.) Add in the fact that Nokia's not yet earning a profit, despite being about a year ahead of RIM in its reboot effort, and even a successful BB10 launch may not be enough to turn a profit for RIM. And if Nokia does manage a triumphant turnaround, it'll be yet more competition for RIM.

Honestly, though, at this point in time, the 51 million units Jefferies says RIM will sell, the 29 million Scotia suggests, or even the 6 million units RIM would only move at a 500,000 units-per-month production rate -- it's all conjecture. Your guess is literally as good as theirs.

Foolish takeaway
I have to say, it all adds up to one incredibly confusing picture. The only thing truly clear to me at this point is that somehow, some way, investors seem to have struck upon the idea that the advent of a device we all knew was coming, has made RIM shares today three times more valuable than they were in September... simply because we're four months closer to launch.

And that really doesn't make much sense.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 23, 2013, at 6:49 PM, m008 wrote:

    Hi, author. I agree with you. And I also did some analysis: RIM just last lost millions subscribers in US/UK/Canada/EU. It only has about 7 million subscribers and still losing 0.5 million subscribers every month since Dec 2012. The Scotia Capital analyst Gus Papageorgiou, who used to predict that 70% of 80 million will upgrade to BB10, but if you look into RIM 2013 Q3 report: RIM has 79 million subscribers and sold about 7 million devices. If we assume 1 million devices are for replacement. That means RIM increased about 6 million subscribers in Q3 and lost 7 million existing subscribers which were included in 80 million and called ‘loyal’. Can you believe there are 7 million subscribers loss among the 80 million existing subscribers just one quarter? Gus Papageorgiou is total no credit to predict anything.

  • Report this Comment On January 23, 2013, at 7:04 PM, digitally404 wrote:

    @m008. You're still talking about 2 year old BB7 devices. Not bad! I bet BB10 will fare much better, question is by how much ;)

  • Report this Comment On January 23, 2013, at 8:06 PM, TimKnows wrote:

    Its no surprise that the Fools on this board have RIMM all wrong, tonight they are crying about their pump on AAPL and it must hurt to be wrong twice in one day!! Let's see, if you choose RIMM, you saw a 52 week high this week, if you pumped AAPL thinking it can do no wrong, you saw a 52 week low this week and the pain is still coming. AAPL is dead, you Fools won't get it until you have nothing left.

  • Report this Comment On January 23, 2013, at 10:39 PM, jwjsprenger wrote:

    AAPL down $50 in aftermarket. BOO HOO HOO

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