|Shares Out. (in M):||570||P/E||15.7x||17.8x|
|Market Cap (in $M):||36,765||P/FCF||22x||32x|
|Net Debt (in $M):||-2,497||EBIT||3,240||2,810|
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Thesis: RIMM is a structural short that will experience market share declines and severe margin pressure over the next few years. We believe that profitability is likely to decline by 25% over the next 2yrs vs consensus expectations of 25-30% growth. Assuming a 13x multiple of 2011E EPS implies 35%+ downside.
How it Plays Out
ASPs will decline from $320 to $250 by calendar yr 2011 vs consensus expectations of ~$270. Due to market share losses, unit volumes will grow from 34m to 45m by 2011 vs consensus expectations of ~60m. This will cause EBIT margins to decline from 22% to 16% vs consensus expectations of ~20%. RIMM will generate EPS of $3/share in calendar yr 2011 (FCF will be even lower) which is 40% below consensus expectations. Assuming a 13x multiple implies 35%+ downside.
What the Bulls Like: The bulls are focused on 4 key points:
What the Bulls Are Missing
RIMM is Massively Over-Earning: We make 3 analogies to illustrate the extent to which RIMM is over-earning:
Enterprise Market is Largely Saturated and Becoming More Competitive: Growth in the enterprise market will decelerate as market penetration is getting increasingly saturated:
Assuming RIMM was able to maintain market share in the enterprise market, we believe unit volume growth will decelerate from 30%+ to ~10%. Our VAR indicates that RIMM is on the verge of losing significant market share to the Iphone over the next 12-24 months. We believe these share losses will result in minimal corporate unit volume growth and potentially negative volume growth.
RIMM is at a Competitive Disadvantage in Consumer Market: RIMM built its success by offering a push email solution that allowed it to gain share in the enterprise market. As consumer demand has transitioned towards multi-media functionality and as email has become increasingly commoditized, RIMMs lack of innovation has put it in a very poor competitive position in the consumer market. This will continue to be a significant headwind as RIMM isn't planning to release its new web based browser until 2H 2010.
RIMM has experienced declines in gross and ebit margins of 10% and 6%, respectively over the past 3yrs as growth has increasingly come from the consumer market. With 65-70% of unit sales and 70-75% of unit sales growth coming from the consumer market today, RIMM is likely to experience continued deterioration in ASPs and margins moving forward.
Inflection Point in Smartphone Competitive Dynamics in 2010: The smartphone market is at an inflection point in which it is transitioning from a market with two major competitors (RIMM and AAPL) to 8 as PALM launches its WebOS products and as MOT/LG/Samsung/Sony Ericson/HTC all launch Android products. In addition, the Iphone is currently going multi-carrier in Europe and is likely to go multi-carrier in the US in 2H 2010. 2010 may be the most competitive year ever in the mobile phone market which will put significant pressure on RIMMs ASP, unit sales and margins as it enters this period with a disadvantaged product portfolio.
Profitability Likely to Decline Over Next 1-3yrs: RIMM is likely to experience annual volume growth of ~10%, annual ASP declines of 10-15% and annual service ARPU declines of ~15% over the next few years. This will result in approximately flat revenues and 16% EBIT margins (500-600bps deterioration). EPS will decline from a current run-rate of ~$4/share to ~$3/share by 2011 vs analyst expectations of ~$5/share.
1) Launch of additional Android products on VZ
2) Iphone going multi-carrier
3) Iphone taking increased share in the enterprise market
4) Carriers pushing back on RIMM subsidies/service fees
5) RIMM misses analyst expectations for FY 2011
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