Stock of the Day - February 13, 2009 - RIMM

Research In Motion, Ltd. (RIMM)

Research in Motion (RIMM), the company that makes Blackberrys, has been in the news a lot this past week. The news has been negative though, as the company reported on Wednesday morning that its 4^th quarter earnings would be at the low end of analyst expectations.  RIMM’s share price, which was barely under $60 as recently as Tuesday, plummeted 14.5% on Wednesday to $48.76.  The company, which is now trading in the high-$40’s, has had an unbelievably volatile year, as it has experienced a 52-week high price of $148.13 and a low of $35.09. 

So, what led to the 14.5% drop in stock price, and was it justified? RIMM, which was expected to obtain 4^th quarter earnings in the range of 83 to 91 cents per share, forecasted that its earnings would be at the low end of the expected range.  The company cited that lower profit margins due to its more costly new smartphones, the Bold and Storm, were the main cause for being at the low end of earnings expectations.  Simply put, the Bold and Storm are more expensive for RIMM to make, and this has caused the company’s profit margins to slip from 45.6% in the third quarter to lower levels of 40-41%.  This means that instead of making a 45.6% profit on every phone the company sells, it now only make a 40% profit.  If you think about how many phones the company sells, it is easy to see how this could really affect RIMM’s net income. 

But, the 4^th quarter report wasn’t all that bad.  While the company did report that earnings would be on the low side of the expected range, RIMM also announced that it added 3.5 million more subscribers in the 4^th quarter, 20% more than the 2.9 million that the company was expecting!  This number tells me that the company is clearly growing its customer base, and it is growing faster than anyone thought.  With Bold and Storm sales doing very well, and with the new Curve 8900 expected to come out soon, the growth should continue at a strong pace for a while.  RIMM’s global market share in the cell phone business has actually doubled in the past two years to 16%, and it continues to expand aggressively across the world. 

So, what do all of these numbers mean for RIMM’s future stock price? First of all, I think the market totally overreacted to RIMM’s earnings forecast on Wednesday, as the company was still within the expected range.  RIMM is in a war with Apple to gain dominance of the smartphone market, and the iPhone is providing some intense competition.  So, it is understandable that the company would take a slightly smaller profit margin for a while in order to obtain as many customers as possible.  By taking a small sacrifice now on the bottom line, RIMM will be able to sign people up to two-year plans and get cell phone users addicted to its crackberrys. People are also underestimating the fact that RIMM increased its customer base by 3.5 million in one quarter, and that this was 20% higher than expected!  I don’t really worry too much that its profit margins slightly dipped amidst the worst recession in recent memory, because as long as RIMM is growing its customer base faster than expected, I think it is an extremely positive sign for the long-term. 

The sell-off on Wednesday was very exaggerated, and now an aggressively growing company is trading at around one-third of its 52-week high.  With new phones that are very popular, and an extremely loyal customer base, I think that RIMM is a great investment at these discounted prices. 

 

Niki Pezeshki

College Trillionaire