Research In Motion (NASDAQ:RIMM). What an appropriate name for a stock that just keeps going up, up, and away ... into the valuation stratosphere, higher than the Great Pumpkin flies.

Over the last five years, these shares have been a 50-bagger -- a $1,000 investment in November 2002 would now be worth $50,000, for a compounded annual return of 118% per year. I offer my congratulations to those who bought and held the company through the dark days of no profits, but as they say in the biz, past results are no guarantee of future success. And in my opinion, investors are setting themselves up for a Halloween trick every bit as nasty as the past five years have been a tasty treat.

First, let me say that I've nothing against the company. In fact, I think it's an excellent company with a great product. I don't own a BlackBerry (I have a Treo), but I know many people who swear by them. Nor do I have anything against Big Boss Jim Balsillie -- although attempting to sell season tickets in Hamilton, Ontario, for a transposed Nashville Predators hockey team before the NHL approved any kind of deal or subsequent move did strike of arrogance.

No, my beef is the positively spooky valuation and the expectations of perfection built into today's share price -- especially if you consider this (as I do) to be a commodity market with new innovations and competitors coming online every year. Remember Palm's (NASDAQ:PALM) original IPO and all the talk of how the company could do no wrong? Remember the valuations? Remember the stock price? Now, take a look at this chart. Now that is scary.


  • Today, RIMM's stock price is $122, and the price-to-earnings ratio is 80. That means that for every $100 you invest, you're getting $1.25 in earnings. Free cash flow is worse, at $0.46 per $100. "Ah, but RIMM is growing," I hear you say. Yet even on the next 12 months of analyst expectations, the P/E is way above 40.
  • Fools prefer cash flow to earnings, and here's where it gets really scary. To justify today's stock price, free cash flow would have to grow by 30% per year for a full 10 years! Even if I believe analyst expectations for 30% growth over the next five years, I still have RIMM's current stock price at double its intrinsic value.
  • RIMM is already a $68 billion company by market cap. It simply can't grow its share price as it has done in the past. In fact, one whiff of disappointing analysts' expectations, and this one will be a damp squib.

Palm was once the can't-miss opportunity in the handheld market, and we can see what happened over the past seven years in that case. I find it unlikely that RIMM will suffer Palm's fate, since it has cemented excellent relationships with corporate users and carriers and is now licensing its system for use by other manufacturers. But the competition will still be fierce, with Nokia (NYSE:NOK), Motorola (NYSE:MOT), and Apple (NASDAQ:AAPL) all keen to take a piece of BlackBerry's pie. And we can't overlook the considerable might of Microsoft (NASDAQ:MSFT) and perhaps even Google (NASDAQ:GOOG).

Ghoulish bottom line
Great product, great company, yes ... but a lousy stock. Sure, RIMM can continue going up for a while, and that's fine if you're a momentum investor working on the greater fool (small "f") theory and hoping that someone will buy it off you at an even more ghoulish price. Why not focus on dirt cheap dream stocks instead?

Here we are, investors, and if you saw the Scary Movie that was Palm, why would you invest in the Scary Movie 2 that RIMM will become?

If you agree with me, head on over to CAPS and rate Research In Motion as an underperform. We'll announce the scariest stock on Halloween.

Want to know what other companies give us the frights? You can view the rest of our hair-raising stocks here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.