Wednesday, June 25, 2008

RIM Enters Risky Arena

BlackBerrys Move
Beyond Business;
Fickle Consumers
June 25, 2008; Page C20

With shares of Research in Motion up 150% over the past year, investors are saying there is almost nothing that can trip up the fast-growing BlackBerry maker. The problem with that: RIM's business is getting riskier every quarter.

The Canadian company, which reports fiscal-first-quarter earnings Wednesday, is increasing its exposure to the consumer market, a fad-driven arena that has caused even the best handset makers to stumble.

RIM's results, along with any profit forecasts, will likely be buoyant and could push the company's shares even higher in the near term. But investors gauging the longer-term direction of the stock may want to zoom in on a number RIM typically doesn't include in its published financials.

This number, often given by an executive on the company's conference call, is a breakdown of RIM's subscriber base. It shows how many of RIM's customers have been given the handset by their employers. The remainder are individuals who paid for a BlackBerry out of their own pockets -- the consumer market.

Analysts have been crunching these data to estimate how fast consumer subscribers are increasing. In its fiscal fourth quarter, which ended March 1, RIM's consumer subscribers grew an estimated 150% from a year earlier. Corporate subscribers were up an estimated 55%.

This consumer growth has happened as the demand for BlackBerry-type devices has expanded beyond corporate users.

RIM is better placed than its rivals to benefit from that change in the cellphone market. Indeed, the popularity of products like the BlackBerry Curve has shown RIM has the savvy to capitalize on mounting consumer demand for keyboard-phones.

Because of this success, analysts now expect RIM to earn $3.88 a share in the year ending February 2009 -- a 70% jump over the previous period. With growth like that, the stock, trading at 36 times forecast earnings, doesn't look expensive.

But there are good reasons why that high growth may never materialize. Perhaps the most important: There could be less room for growth in the U.S. consumer market than the bulls think.

Morgan Keegan analyst Tavis McCourt estimates that RIM supplied AT&T and Verizon Wireless with as many as 1.5 million handsets each during RIM's fiscal first quarter, which ended in May. That would represent a substantial 13% to 20% of the two carriers' handset sales, excluding free phones, in the period.

"RIM has little ability to dramatically improve its share at its two largest customers," Mr. McCourt wrote in a recent research note. He says that RIM's sales to Verizon and AT&T may have accounted for as much as 40% of RIM's revenue in its first quarter.

Another worry that doesn't appear to be in the stock price is competition in the smart-phone market from Apple and Nokia.

In theory, RIM, which declined to comment, could beat off competition with another doozy of a product like the Curve. But the next big product launch for RIM is the Bold, a device that works on the third-generation, or 3G, wireless technology. "I'm not sure the Bold drives new users; it drives upgrades," Mr. McCourt says. Indeed, a big risk is that instead of upgrading, consumers will grab a now-cheaper iPhone.

While the BlackBerry is a great product, it is hard to see why RIM should have a price-earnings ratio above Google's 27 times. RIM is ripe for a fall.

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