Friday, February 12, 2010

Research in Motion (NASDAQ:RIMM): To Go Where No Blackberry Has Gone Before: Upgraded to Top Pick at RBC

RBC Capital is making a bold call on Research in Motion (NASDAQ:RIMM) upgrading the stock to Top Pick from Outperform with a $120 price target (prev. unch) implying 73% upside.

Past the "Bogeys". RIM's stock has now passed its "bogeys": Storm stumbles, AAPL/GOOG launches, ASP/GM downshifts. A VZ iPhone is only 50% likely CY10, reflected in valuation, and nominal impact on RBC's sensitivity analysis.

With valuation at 14x Street, near historical lows, below peers, reflecting largely downside scenarios, and with upside catalysts pending, the firm sees positive risk/reward and rare opportunity to enter RIM shares.

- Realization I: “Not Dead”. Catalysts include strong quarterly financial results at healthy margins, sustained channel leverage, Enterprise refresh, global momentum, sustained US market share

RIM’s strong momentum has not reflected a company that is on the ropes due to Apple, Google. RIM has maintained strong momentum and consumer share gains during the entire period since iPhone came out (since June 2007 when iPhone was launched, RIM’s annual shipments have expanded 93% CAGR, Smartphone share from 13.7% CY07 to 20.6%% CY09), and subsequently strong financial results despite concerns about RIM’s business model.

Checks: Q4 Tracking Above Plan. Fresh channel checks (75 retail stores) preliminarily show strong BlackBerry sales, including a strong resurgence at AT&T and blowout BlackBerry Bold 9700 sell-through (at AT&T and T-Mo). These checks preliminarily suggest RIM’s Q4 (end Feb) is tracking above plan (RBC at 4.6M vs. management guidance for 4.4-4.7M sub adds). Catalysts that may offset historical Q1 seasonality include: 1) full quarter of new products (Tour2, 3G Pearl); 2) buzz around new software (UI, browser, apps); and 3) sustained carrier promotions and continued international awareness, which may offer possible upside to RBC's current Q1 estimates for 11M subs, 4.4M ships, $4.3B rev and $1.25 EPS (Street at $4.3B and $1.21).

- Realization II: “Closes the Gap”. Catalysts include improved browsing experience, updated user interface, further developer/application momentum.

Investors’ uncertainty concerning RIM lagging Apple, Google, etc. has overhung valuation. RBC agrees that RIM did “drop the ball” regarding updating its “front end” software (browsing, UI, bundled and downloadable applications, SDK, etc.), lagging Apple and missing the emerging consumer demand for rich mobile browsing, a thriving consumer application ecosystem, and intuitive, elegant smartphone UI. RIM’s UI and PIM, while reliable and functional, remained essentially unchanged for 10 years. However, they disagree that RIM will not catch up with – even in some ways surpass – these trends, by evolving its UI, browsing, application and mobile media experiences (both on devices and on the PC), to pace competitors and meet evolving consumer expectations. Firm notes that RIM, while historically lagging competitors in rolling out software innovations (attachment viewing, OTA downloads, HTML email, the opening up of its platform to third-party developers, Application Store, etc.), subsequently recovered ground once launching its version.

- Realization III: “RIM Regains the Crown”. New “cool” consumer handsets, “Super Apps” (application partnerships leveraging RIM’s platform), competitor shakeout -- and further positive surprises.

New “Cool” Consumer Handsets. RIM is expected to launch 16 new devices CY10, up from 5 in CY09, all of which are expected to be compatible with RIM’s pending updated software (UI/browser), while late CY10 next-gen devices will showcase the revised BlackBerry user experience and incorporate possible new form factors. CY10 device launches may include: a) an updated Tour (codenamed “Essex”); b) 3G Pearl 9100 (codenamed “Striker”); c) emerging markets Bold (codenamed “Atlas”) targeting China; d) Touchscreen Bold 9900 (codenamed “Dakota/Magnum”); and e) Storm slider with slide-out keyboard and large touchscreen.

2010 Moving to RIM
Consistent with RBC's Smartphone industry report published on August 18, 2009, “The New World Order”, mobile data is different than PC or Internet; the market is not a zero sum game – and RBC believes fears of decimation of RIM’s franchise are overdone.

2010 Moving To RIM. Reversing concerns about recent trends (Apple, Google, etc,), RBC foresees 2010 trends favoring RIM, as Smartphone growth shifts beyond US-centric iPhone clones to: 1) browsing + mobile email, leveraging RIM’s “crackberry” advantages; 2) International, where RIM has unmatched distribution breadth; 3) entry-level and SMB users, where RIM has significant cost advantages (ASP $320 at 35% HW GMs vs. iPhone $600 and GOOG $530). RIM’s efficiency becomes a visible competitive advantage, vs. data-sucking Smartphones hogging carrier networks, sustaining ARPU.

Street Estimates Remain Beatable. FTM Street estimates are in RBC's view overly pessimistic and reflect a negative share/margin loss scenario. Firm's F12E EPS of $6.33, above $5.33 Street, assumes stable NA share (30-40% Y/Y growth), international momentum/share gains, 42-43% GMs, accelerating consumer uptake. Q4 checks show momentum above plan, with pending product launches (Tour2, 3G Pearl) to drive upgrades and consumer uptake.

Notablecalls: RBC's Mike Abramsky (and his team) have done a wonderful job dissecting the RIM ecosystem. It's a must read for any RIM follower.

RBC highlights several potential upcoming catalysts, which should create some interest in the name today despite yesterday's move. If you look at RIMM's price performance over the past couple of weeks you can clearly see the stock has been under accumulation.

The market is looking red this morning following weaker than expected Euro econ. data which should enable you to get decent fills in the name.

I would not be surprised to see the stock trade above the $70 level & closer to $71 if the market plays ball.


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