High-Priced Research

Goldman Sachs (NYSE: GS  ) delighted Research In Motion (Nasdaq: RIMM  ) investors late last week after its analysts suggested that the Canadian wireless messaging specialist looks ripe for a takeover. The company's share price leaped 6% in response to the analysts' report.

Fair enough: Any big telecom player like Nokia (NYSE: NOK  ) or Motorola (NYSE: MOT  ) would love to get its clutches on Research In Motion's BlackBerry wireless platform and its hold on the corporate messaging arena. In the third quarter, Research In Motion reported revenues of $366 million, up 18% from the second quarter and 138% year over year. That's eye-catching growth.

But who's willingly going to pay the $76.31-per-share price? Even with the company's shares down from their 52-week high, at that price I'm not convinced a big fish will take the bait.

The stock is expensive. Research In Motion projects sales of $1.4 billion for 2005 and has a market capitalization of $15 billion. That means the stock is trading for a whopping 11 times sales. Compare that with rival palmOne (Nasdaq: PLMO  ) , which sells for 1.5 times sales, or Nokia, which goes for two times sales.

Based on subscriber estimates for 2005, a corporate buyer would have to shell out about $3,400 per subscriber. My own back-of-the-napkin calculations, by contrast, suggest that the value of a Research In Motion subscriber is less than $1,000. To say the least, the market has priced all the good news -- plus much more -- into the company.

It's not as though there are no risks facing Research In Motion. Despite its early market lead, the widespread deployment of data-friendly 3G wireless networks will prompt technology leaders such as Microsoft (Nasdaq: MSFT  ) , Qualcomm (Nasdaq: QCOM  ) , and Nokia to enhance their own offerings. Don't forget that Research In Motion is embroiled in a lawsuit over its alleged infringement of patents. Losing the suit could result in heavy financial penalties or a painful injunction.

Few things move a company's shares like takeover talk. Goldman's analysts report is just that -- talk that investors can afford to overlook right now.

For related Fool Takes, see:

Fool contributor Ben McClure doesn't own shares of any companies mentioned in this article.


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