We’ve been arguing for the past year or so that Research In Motion (RIMM) is screwed.
The company’s BlackBerry smartphones have been leapfrogged by Apple and Android, the consumer market (where most of RIM’s growth is coming from) is increasingly competitive, and RIM’s stronghold in the enterprise market is starting to break down.
In short, we think RIM is in danger of becoming the next PALM–a one-time market leader who lost a step and eventually imploded.
Wall Street is starting to agree, with several analysts recently slapping SELL ratings on the stock. The latest to do so is Colin Gillis of BCG.
Here’s a summary of his note:
We have respect for RIMM’s historical success, but the company’s core strengths of security, keyboard, compression, and battery life have a diminishing appeal to both consumer and enterprise customers in a brutally competitive and rapidly evolving smart phone market, in our opinion.
The ageing King of the Enterprise
We expect RIMM to maintain a strong presence in the enterprise market – but this market is likely to add fewer than 4 million net new additions in FY2011 – less than 20% of total – with the bulk of the growth in the corporate market replacement units. The enterprise segment is also subject to volume discounting, and a growing trend of reducing costs by allowing consumers to use their own devices. The competitive landscape in the enterprise is also expected to increase as Microsoft launches Windows Phone7 with tight exchange and office integration, and HP revamps its Palm product.
Consumer Growth at Risk as Android Rises, and if Apple expands Carriers
RIMM faces the formidable engineering talent of Apple and Google as it competes for consumer customers. While we currently expect over 80% of net additions in FY2011 comes from consumers – these estimates are sharply at risk as Google Android devices explode in popularity, and there is the potential for Apple to expand its carrier coverage in the United States. In terms of functionality, while Apple users are video chatting, and Android has augmented reality, RIMM users have just gotten a decent browser. Additionally there is poor brand loyalty as a recent study by Nielsen showed that only 42% of current blackberry owners desired another blackberry, compared to 89% for iPhone users and 71% for Android users. “I carry one because my company gives me one” is a refrain we have heard often in our research process – and a meager investment thesis. Finally, we expect RIMM to constantly increase its marketing costs as smart phone competition intensifies.
Playing Catch up is Expensive
Good mobile technology companies are expensive – and Google is an aggressive acquirer, with Apple, Microsoft and others in the market to a lesser degree. It is going to be very difficult for RIMM to catch up to the current pace of innovation either organically and via acquisition.
A Slow Fade
We expect RIMM shares to remain volatile – both up and down. With expectations low for its earnings results next week – it’s possible that increases in channel inventory and/or lower than expected marketing costs could cause results to beat a low bar. That said, we maintain that the competitive positioning for the company points to a slow fade in overall market share.
Where We Might Be Wrong
With RIMM shares down over 30% year-to-date, our SELL call is already in effect. But while shares may seem reasonably priced at 8x our FY2011 EPS of $5.45, we remain concerned that the assumptions in our model on consumer additions may be too aggressive. That said, the company has tailwinds from overall growth in the smart phone market, and there is the potential for existing lawsuits to cause the Android platform to become impounded or destroyed, as cited in the patent complaint pa=1418106 filed in the Northern District of California. Finally, a takeout is possible as the space is attractive, but we mention RIMM’s $25B market capitalisation is a barrier.
RIMM has $3.3B ($5.85 / share) in cash & securities with $1.1B in operating cash flow last quarter.
We initiate coverage on RIMM shares with a SELL rating and a $38 12-month target.
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