August 25, 2010 - 12:51am EST by
2010 2011
Price: 47.00 EPS $0.00 $0.00
Shares Out. (in M): 558 P/E 0.0x 0.0x
Market Cap (in $M): 26,200 P/FCF 0.0x 0.0x
Net Debt (in $M): -2,348 EBIT 0 0
TEV ($): 23,852 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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Research in Motion is a manufacturer of smartphones.  The company dominated the market for corporations where its email technology gave it an edge over the last decade - and more recently the company made strong in roads into the consumer market.

Consumers now account for more than half of RIM's subscriber base, up from 25% just two years ago.  The consumer market is a double edged sword, because margins are lower (due to intense competition) and consumers are more fickle.  

Although the RIMM BlackBerry was the superior communications device for email functionality the BlackBerry platform is now a distant competitor when compared with Android and iPhone patforms which are rapidly gaining share in the marketplace for smartphone - and the smartphone category is rapidly becoming the overall winner among wireless devices.

The timing is good for Research in Motion continue its recent under performance.   The company is likely to face significant additional downside risks because of the lackluster launch of the BlackBerry Torch.  At present, RIMM has missed the boat and an entire product cycle.  Android phones and the Iphone are far better (and far more popular products) that consumers are voting (en masse) to adopt and Blackberry is going to be one of the big losers from this mass exodus.  

We believe that Research in Motion is well behind its key competitors in its smartphone features and functionality and the company is poised to lose meaningful market share in North America on the consumer side and probably also on the enterprise side as well.

Adding to the thesis, Verizon accounts for about half of RIM's sales.  This concentration with a single customer is troubling, because Verizon is heavily promoting its Android phones and has been rumoured to eventually be getting the iphone.  Given these alternatives and its dependence on Verizon, RIMM's unit volumes should plummet over the next quarters.

While the Torch, which RIMM recently rolled out was supposed to be the company's answer to these superior android and iphone like products, the reviews and reception have been tepid (at best).  The Touch is considered underpowered relative to similarly priced phones

The additional nail in the coffin (at least on the consumer side) is that both Android and iPhone have extremely robost availability of applications in their respective applications markets.  Blackberry recognizes that the availability of applications is critical to consumer preferences for the phones.  Since Blackberry runs on a proprietary OS and is and will be losing share in the consumer market, it will be difficult, if not impossible for Blackberry to be competitive when it comes to the availability of applications.  As such, RIMM is going to be a big loser in the next 2 to 4 quarters and its market share losses become permanent, and RIMM loses a large share of its Verzion consumer units to Android based competition.

Biv930 posted a good write up on RIMM as a short in December 2009 which I highly recommend reviewing.

The above write up by Biv930 provides additional detailed analysis which is still applicable as to why the company has been overearning over the last 3 years or so and why margins and marketshare are set to decline.  The thesis has turned out to be correct to this point as the stock has already declined 28% since that writeup was posted.

However, the factors cited above and discussed in that writeup are not completely played out.  Consensus EPS estimates for FY 2011 and FY 2012 are still too high.  Currently, the consensus estimate is for the company to earn $5.56 and $6.00 for FY11 and FY12 (ending Feb) respectively.  This on estimated revenues of $18.7B and $21.9B respectively.  With a forward PE based on estimates of under 10x, the company ostensibly looks cheap on its face.

However, the earnings estimates and revenue estimates are far too high (as further elaborated in Biv930's write up).  Since that write up, the Blackberry Torch - which was the hoped for salvation for the company turned out to be a dud.  Given the competitive outlook for Blackberry share relative to currently superior options, especially on the Android side, we believe that the company will post disappointing results in the 3rd and 4th fiscal quarters that will show accelerating declines at both top line and bottom lines leading to sharply declining earnings estimates for 2012.  The stock should experience an additional 20 to 30% downside from current levels prior to year end in anticipation of a very poor 2012. 


Accelerating market share losses, declining revenues, declining margins, and downward revisions to FY 2012 earnings estimates and FY 2012 revenue estimates by Q4 FY 2011.
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