Column: RIM investors get nervous

by Mathew on September 30, 2005

Here’s a column I posted at globeandmail.com about RIM’s stock falling on its latest results:

“Research in Motion co-chief executive officer Jim Balsillie often gives the impression he’s frustrated by the lack of respect the Waterloo-based company gets, and it’s easy to sympathize. After all, RIM just reported blockbuster sales growth, a huge number of new subscribers and new deals with tech industry leaders such as Intel and Nokia. And what did the stock do? It went south. Not only that, but all anyone can talk about is how Microsoft and Nokia and little upstarts like Good Technology and Seven are going to eat Jim’s lunch.

So what does a company like RIM have to do to get the kind of recognition it deserves as a technology leader?

RIM’s problems actually have very little to do with its technology. Almost everyone agrees the BlackBerry is a great device, and that the kind of end-to-end email solution it provides for companies is second to none. The company continues to sign up telecom partners around the world, and it has new devices either on the market or coming soon that will help bridge the gap between the type of handheld PDA that primarily does email, and newer “smart phones” that do voice, email and other things. Better still, the BlackBerry name has tremendous brand recognition in the marketplace, which is hard to duplicate.

So what’s the problem? The problem is that all of those good things are already priced in to RIM’s stock. In other words, the market is taking all of that for granted, and looking forward – as it always does – to the future. And given the presence of significant players such as Microsoft (now partnered with Palm) and Nokia, investors seem a lot less confident about that future than Mr. Balsillie and his team.

Does that mean RIM is in danger of becoming unprofitable, or that sales might start to shrink? Hardly. But the stock isn’t priced for survival, or even the status quo, it is priced for growth — and rapid growth: RIM is selling at 21 times projected profit per share, while Palm sells for less than 8.

That’s why every time the company reports subscriber numbers or profit margins that are a little shy of consensus, the market is so unforgiving. In the most recent period, RIM said it added 620,000 new subscribers, for a total of 3.65 million — up 120 per cent over the same period last year. But that 620,000 figure was well below what analysts were looking for, and it also wasn’t the actual number of subscribers added. The “net” figure was actually 540,000 — RIM had to adjust its numbers after several of its partners said their lists were out of date.

But these are quibbles, aren’t they? After all, the company is forecasting that subscriber growth will continue and that it will end the year with about 5 million subscribers, which is impressive. Some analysts wonder, however, whether it’s impressive enough to justify the stock’s current price of $70. RIM said the lower pace of subscriber additions reflected “seasonality” in some of its markets, which led one analyst to wonder why something as popular as the BlackBerry would be subject to seasonality — not to mention why there would be more seasonality this year than last year.

The main concern is that RIM’s growth might be starting to slow, and that it might slow even more as more large competitors attack the mobile email market. Microsoft, for example, will soon have a Palm Treo — one of the most popular smart phones — that runs its software, as well as a free Exchange email package that allows RIM-style functionality. Nokia will soon be offering a RIM-style email service that does the same thing, but with equipment that costs less than RIM’s. And then there’s Good, and Seven, and Visto, and IntelliSync.

As Deutsche Bank put it in a recent report, in which it downgraded the stock to “sell”: “While the company arguably has the leading push e-mail solution on the market, this does not guarantee a continuation of past growth rates in the face of mounting competition. Even if all of the many competing products and services coming online this year prove inferior to the BlackBerry, their sheer number will weigh on RIM’s outlook, with pricing pressure across product and service lines.”

It’s true that Nokia will also soon be offering phones that can run RIM’s software, as part of its BlackBerry Connect program, but even that raises troubling questions. Why? Because hardware sales still account for 70 per cent of the company’s revenue. And it gets a lot less in terms of revenue from its software than it does from selling the hardware — one analyst says RIM would have to sell 12 licenses to make up for one lost hardware sale — which could explain why the company hasn’t really pushed the idea much in the four years or so it has been around. By trying to convince carriers and phone-makers to just license its software, it could wind up cannibalizing its core business.

Is it any wonder RIM investors are a little jumpy?

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