Friday, March 13, 2009

Research in Motion (NASDAQ:RIMM): Initiated with a Sell and $30 tgt at ThinkEquity

ThinkEquity is out with a gutsy call on Research in Motion (NASDAQ:RIMM) initiating coverage with a Sell rating and a $30 tgt.

RIMM is a great company that pioneered and became the driving force behind the adoption of mobile email. However, while RIMM remains one of the fastest growing companies in terms of sales and year-over-year subscriber growth they expect margins will continue to be squeezed due to 1) current competitive dynamics and 2) the need for RIMM to invest higher amounts to expand. Some of this has been recognized by the deterioration of the stock, but the firm believes there is still significant downside to current earnings estimates.


Revenue Growth Should Slow as ASP Pressure Intensifies: RIMM is a smart phone company (81% of revenues last quarter were hardware), albeit a highly differentiated one, which stands to see increasing competition from the number of new entrants now coming into the market. The handset sector has always been brutal where distribution is sometimes as important as the quality of ones product portfolio, but it is also facing a new wave of competition in its core market in QWERTY smartphones.

Gross Margins Will Be Increasingly Pressured : In addition to the pressure supplied to ASPs from the worsening economy and improving offerings from the top 5 OEMs such as Nokia's new E75, RIMM faces multiple new competitors into its high margin niche ranging from Apple and HTC on the high-end to Huawei (high and low-end) and down to the low-end. As a result they have been hearing that carriers are asking for price reductions across all vendors including those at the very high end of the value scale.

Operating Margins Are Also Facing Growing Pains: Up until recent years RIMM has enjoyed incredible success going after the prosumer market with its QWERTY devices and has made some traction into the non-professional consumer market. In order for RIMM to continue its growth it is becoming necessary for it to invest more money into its distribution channels in the form of bricks and mortar or via advertising. Its much larger competitors like Nokia and Samsung have invested significantly in their own distribution networks – the firm does not expect RIMM's operating margins to approach those of the big 5, but they believe that further erosion of OMs is likely.

Corporate Layoffs and Cost-Cutting May Impact Subscriber Growth & Replacements: RIMM reported last quarter that 45% of its subscribers are non-enterprise, but ThinkEquity believes there are actually many non-BES professionals using RIMM's products. It is often cited as an advantage to have so much of RIMM's customer base tied to enterprise, but given the high rate of corporate layoffs currently, they think that even RIMM with its multiple product cycles underway will have trouble growing in this environment. To combat this decreased spending environment they believe that RIMM will be forced into making more price concessions.

Notablecalls: I wanted to put this one in front of you because it's going to get attention today. I'm not entirely sure RIMM will get hit on this in any major way, though as the call doesn't say anything new.

ThinkEquity used to be good. They have lost a lot of their cred. over the past yrs, unfortunately.

No comments: