RIMM is down 62% in the last 3 months compared to 51% for firm's coverage median and 32% for the S&P 500, on concerns of slowing demand and margin compression as a result of competitive offerings from Apple and others.
Goldman believes that following its sharp pullback, the stock already prices in the risk that FY10 (Feb) Street estimates will come down further, and they remain 20% below consensus at $3.62 vs. the Street at $4.55, reflecting just 4% YoY growth. However, with the stock trading at 13X below-consensus estimate, compared to the S&P500 at 11X and coverage median of 16X, they see the valuation as compelling, as they think RIM can grow its earnings in the high teens going forward past 2009 due to its increasing market share in the rapidly growing smartphone market. Firm sees 44% upside to their 12-month price target of $68, based on 19X P/E.
Goldman thinks RIM will reach the low end of its F3Q (Nov) guidance for four reasons. First, as noted in their 11/16/08 report, checks reveal that sales of its recently introduced Bold device are off to a good start. Second, the fact that the launches of both the Bold and the upcoming (on Nov. 21) Storm fall within F3Q suggest reduced risk to numbers given the need to fill the channel. Third, despite acute investor concerns over the impact on RIM’s business from the market turmoil, our IT Survey taken in mid-October showed a relatively mild deterioration in US enterprise demand; for context, the financial services vertical drives around 12% of RIM’s sales. Fourth, firm's estimate of more than 500bps margin compression over five quarters may prove conservative due to 1) a stronger US$ which helps from an opex and component perspective, and 2) a possible slowdown in hiring and marketing spending in response to the deteriorating macro.
Notablecalls: Well, RIMM will trade up from here. The call is also a clear sentiment positive for the whole market. Think the stock can challenge the $50 level on this call.
PS: Spoke to a tier-1 trader this AM who said SP will hit 900 soon.