Investor Faisal Laljee (Seeking Alpha) can’t make heads or tails why Research In Motion (RIMM) has slipped from $145 to $115 after only a slight earnings miss last month. This is no mystery: The company is at war with Apple (AAPL) to protect its business franchise and capture the consumer market, and increased marketing spending on the latter front is hurting margins. (And, of course, the broader market is collapsing).
Even after the miss, RIM still trades at more than 40X trailing earnings, so there’s still a momentum premium in there. It has sold off considerably, so Faisal is probably right that it’s due for a bounce. Eventually, however, even if the business continues to thrive, RIM will trade at 25X-30X. Don’t believe us? See the demise of every momentum stock in history.
RIM is an excellent company, and ramping spending is the right move. What’s good for companies, however, isn’t always good for stocks, and in this case RIM can’t have it both ways. The first miss for a momentum stock like this usually isn’t the last, and as RIM continues its push into the more price sensitive consumer market, the stock’s multiple will likely continue to compress.
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