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Appetite for Risk? Rise with RIMM

Posted on: August 8, 2008 - Email Article - Printable Version

Santosh Sankar

About the Author:

I do not want to join the bandwagon of market enthusiasts promoting this company, but i RIMM Logo t is hard to ignore the potential profits it offers investors. Research in Motion [RIMM: 41.52, -3.81 (-8.41%)], the maker of the famous Blackberry has a lot going for it right now. Although the macro environment bears down on it, the loyalty it receives is deserved with its innovation. In my opinion, the Blackberry is an industry standard device. It is hard to see a professional these days without one, typing away emails, checking up on schedules, reading the latest headlines, and lets not forget, talking to their family. The all in one device offers great computing power, necessary in this information age. Looking into the future, where is Blackberry going to continue growing revenues for RIM?

The Present

The Company

Headquartered in Ontario, Canada, Research in Motion provides top of the line smart phone devices. The company manufacturers the renowned Blackberry devices, developing both the hardware and computing platform that has helped professionals constantly connected and productive. The company currently offers 15 different devices with service worldwide. Currently, RIM’s largest wireless service providers are Vodafone (and Verizon), AT&T, and T-Mobile amongst many others. The wide international coverage makes RIM products attractive to people, I know the executives I work with all have one and love it.

The Numbers

Price: $133.75
EPS (ttm): $2.71
P/E (ttm): 44.38x
PEG (ttm): .43x
P/FCF(ttm): 162.48x
Beta: 2.42

(All data from Reuters Online)

The past 12 months have treated RIM very well, the share price has seen a gain of over 66%. We can see that currently, the company is enjoying the business it is receiving from corporations and professionals who leverage their device to lead more productive lives. The stock has been very volatile, booking a Beta of 2.42 and has seen a 52 week range of $61.54 to $148.13. It is imperative to see the horizon and analyze how cash flows can be boosted while stabilizing the stock. I am sure you are aware of the new products RIM is planning that has made me so optimistic.

The Future

RIM has a wide selection of devices, and in the next month the new Blackberry Bold is set to release. The company has announced a two week delay on the device, many analyst believe this is a minor thing and won’t affect earnings. The rumor mill also has revealed two other devices, The Thunder a touch screen phone that is set to rival the iPhone and The KickStart. The Thunder surfaced with online reports in May, and apparently should hit store in September. I’d rather not focus on speculation, but what RIM has officially stated it will offer.

RIMM 1 year Chart from Stockcharts.com The Bold has debuted in other countries and touts improved performance as RIM continues to better its product offering. The Bold offers great potential to increase cash flows which can improve free cash flow if current expenditures are maintained. The PEG of .43x signals great growth ahead as well with the company moving to solidify itself as #1 in the smartphone market which in turn should increase free cash flows. I think that the Bold can more than double quarterly revenues YOY, keeping in mind that historically the company has seen such revenue growth. According to latest the earnings report, the average selling price of RIM’s devices is in the $300 ballpark, estimating a conservative sales volume of roughly 1.1 million units, the Bold will bring in sizable revenues in addition to the other segments. Apple [AAPL: 80.49, -5.80 (-6.72%)] has sold over 1 million iPhone 3G units and it only makes sense to me that despite consumers growing more hesitant to spend, the industry leader can surpass the iPhone’s mark. Investors should recognize such potential and buy on any declines. The economic slowdown is a concern, but I would also like to provide my input on the competition present in the industry.

Blackberry v. iPhone

The big debate has been over which product will win over the majority. Will the Blackberry remain at the top? Or will the iPhone takeover? It is obvious investors want to find the winning side and ride it up as they pocket the gains. I think that RIM offers the better business solution, while Apple [AAPL: 80.49, -5.80 (-6.72%)] offers the better lifestyle solution. The Blackberry’s sleek yet still conservative look is more appropriate for business settings, as well as its tested and accepted OS. I do not want to insult the iPhone, it is beautiful in it’s own right, but I have also heard from fellow contributors about the possible security concerns corporations have. Keeping professionalism in mind, for the design, functionality, and security aspects of a device, Blackberry wins.

In addition, we must remember corporations have spent a lot on rolling out the Blackberry to it’s ranks. It is snot reasonable to expect them to change their communication devices over to the iPhone. Corporate software packages from Oracle, AT&T, and Microsoft amongst many others are not only familiar but fairly stable with the Blackberry. I know for a fact that executives do not have the time for drastic changes such as a total conversion to the iPhone especially in stressful operating environments such as this. We have visited the present and promising future of RIM, but what about the risks? After all, I only recommend buying in if you can tolerate a volatile equity in your portfolio.

Risks

RIM brings a high beta and a rather unattractive P/FCF multiple, lets look at risks that are turning investors away.

iPhone 3G breaching on market share
Blackberry Bold being a bust
Economic slowdown
Corporate customers willing to transition to the iPhone
Patent issues over products
Lack of transparency

These are some of the problems that could really hurt RIM over the next year. I want to urge prudence when getting in as I remind you that the volatility is what brings the great gains but also the force that will deal heavy losses. In order to protect one’s self against any losses, put options could be purchased, but I recommend only the most savvy investors use such tools.

The bottom line, RIM is a great long term prospect, it offers quality products that have a solid footing in it’s market space. I suggest for the time being that only risk tolerant people buy in around $129 or below and be ready to take money off the table as it approaches $150.

-Santosh Sankar

Disclaimer: None.

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