Friday, June 25, 2010

Research in Motion (NASDAQ:RIMM): Sing me no song! Read me no rhyme! Don't waste my time, Show me!

Research in Motion (NASDAQ:RIMM) is getting no love from the analysts this morning after missing consensus revenue, ASP & volume estimates last night.

While there are analysts preaching their 'RIMM's cheap at 9x FY11 EPS' views, I'm going to highlight the more cautious-to-negative views from several firms:

- Bernstein's Pierre Ferragu has been cautious on RIMM for quite some time and rightly so. He maintains his Underpeform rating and $55 target on the name. This is what he has to say:

The set of result supports our thesis: RIM gains traction via the trading down of the brand and is
losing ground on the corporate / high-ASP consumer segments:

- Growth in international markets and low ASP segments continued to play out positively, with a positive impact on margins and a negative impact on ASP. ASP of incremental business1 remains extremely low at $165 this quarter, vs. $390 a year ago.. It is important to note that the slow down in overall shipment growth also supported margins as it increases the share of services in the company's revenue mix. This quarter, SG&A control and the share buyback also supported the EPS that would have been in line with our expectations without these two factors.

- Management comments are still overly optimistic about the positive impact of new product launches for the second half of the year and we remain cautious on that front: new products will hit the high end of the market in which Blackberry show continued signs of weakness, as shown by the low ASP of incremental business and recent consumer surveys.

Our initial bear case was based on three convictions. It is priced in the levels the stock was trading at aftermarket yesterday.

- BlackBerry phones have lost their breakthrough differentiation (the flawless mobile email) that is now available on most smartphone platforms. In the elements that underpin the current smartphone experience, BlackBerry specific technology isn't a clear competitive advantage.

- RIM's pricing power is still strong but now derives only from "trading down" dynamics that won't last forever. This will deteriorate in the long term as RIM shifts towards a market place in which scale, breadth of product portfolio, and distribution matter more and more.

- RIM's initial markets (Corporate and high-end consumer / "prosumer") don't drive growth
anymore. As a consequence, in the medium term, we expect a disappointment in shipments and / or ASPs in the next 6-9 months.

We foresee additional downside risks which are likely to accelerate RIM's decline, but it is unlikely that these risks materialize this quarter.

- Accelerating share loss in existing channels. Apple's expected iPhone expansion into additional
carriers over the next 12 - 18 months will likely come at RIM's expense. RIM currently distributes through 10 of 13 carriers that Apple could expand into, and our analysis suggests that RIM would lose up to two-thirds of its growth potential (or 7M+ units) if Apple were fully represented in 2010 in those 13 carriers.

- Mounting risks of share loss in the corporate business that account for over half of RIM's profits. The latest Bernstein CIO survey points to 41% of companies issuing or supporting the iPhone (up from 11% two year ago), and AT&T recently stated that 40% of its iPhone sales this year have been to business customers.

As a consequence, we maintain our underperform rating. We nevertheless keep our price target unchanged for now, as we wait for more clarity on how much of these additional downsides can play out in the next 12 months.

- Goldman Sach's Simona Jankowski reiterates her Sell rating on RIMM with a $56 target (unch):

RIM has now missed top-line expectations for three of the last four quarters, in our view demonstrating the building competitive pressures on its business from the iPhone and more recently from Android. We estimate that net subscriber additions in North America declined on a sequential basis, which we attribute primarily to the success of Android-based phones, such as the Motorola Droid and the HTC Incredible at Verizon.

Despite the top-line miss, RIM delivered EPS upside largely by cutting opex, with SG&A declining 3% qoq as opposed to its guidance for a 2-4% qoq increase. In addition, gross margin of 45.4% was above expectations of 44.4% as a result of a greater mix of higher-margin legacy EDGE products such as the 8520. However, we do not view either of these factors as sustainable drivers of EPS upside longer-term. RIM guided opex up 7- 10% qoq, compared to sales guidance of up 6% qoq, and reiterated its guidance for gross margins to decline in 2H FY11 as new products ramp.

We are updating our FY11/12/13 EPS estimates to $5.28/$4.79/$4.75 from $4.76/$4.78/$4.92, reflecting the near-term margin upside and deteriorating longer-term top-line trajectory. We remain Sell-rated until we can build confidence that RIM’s product cycles can improve its competitive position

- Citigroup's Jim Suva reits his Sell rating on RIMM while lowering his target to $50 (from $55). After hours RIMM stock traded down 4-5% following the May quarter results which were a mixed bag but certainly not the stellar results bullish investors were hoping for & opened the door for more questions.

Stock Call — Reiterate our Sell Rating & lowering our target price from $55 to $50 as we roll forward our EPS valuation one quarter & we expect EPS to decline in the future (stock buyback may mitigate some but core EPS likely declines) due to lower gross margins & higher op ex spend. Our investment thesis focuses on BYOD (Buy/Bring Your Own Device), Sandboxing (corporate security & regulatory compliance rules & data compression on phones that have virtualized work & personal functionality), & Promotion Commotion (carriers changing promotions) in early adoption.

- Baird's William V. Power is downgrading RIMM to Neutral from Outperform while lowering his target to $59 (from. $88)

Based on our store visit findings and product roadmaps, we expect further share gains from Android-based devices, as well as the iPhone. New Blackberry devices should help, but we increasingly fear it may be too little too late to turn the tide in the U.S. Despite what appears to be an attractive valuation level, we expect competitive concerns to continue to overhang the shares.

Notablecalls: Some of you may disagree with me for highlighting only the negative comments but do think twice before hitting that Send button on the hatemail - Did you really expect me to highlight RBC Capital Mark Abramsky cutting his Street high $120 target to $90 while keeping RIMM as his Top Pick?

As Bernstein and Goldman point out, RIMM would have missed bottom line estimates had they not cut their opex. In this competitive environment you can cut opex by only so far. Sooner or later it's going to come back and bite you in the arse.

I have said it before & I will say it again - RIMM is fighting a losing battle.

I'm not even talking about the iPhone stealing their clients but rather Android coming for it's pound of flesh in a big way. The carriers & developers are turning their focus on Android and leaving RIMM on the background.

Unless RIMM can come out with TOTALLY new kind of products, offering something mindboggling, they are slowly but surely turning into...Nokia. It won't happen overnight, not this year, maybe not even next, but eventually RIMM is going to find itself with much lower margins.

Take a look at their current product pipeline:

Boring, right?

I'm not making a trading call to short it here. RIMM's cheap right now (although it's now likely a value trap) and has a considerable short interest. Sure, it could go down a cpl of more points on heels of this commentary but it could also bounce.

I'm staying away..both short-term & longer-term.

PS: Abramsky's note is titled: 'Sing me no song! Read me no rhyme! Don't waste my time, Show me!'

Apparently, Mike's into musicals...

Nothing wrong with that!


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