Research in Motion Catches a Bid
MacTards worldwide are sensing a disturbance in the force today as Research in Motion (RIMM-NASDAQ) trades up 5 points thanks, in part, to an initiation of coverage from Avian Securities.
The stock is quickly putting the negative Credit Suisse chatter, which was prominently featured on certain websites, in the rearview mirror. Of course this call is getting very little play at those addresses:
We are initiating coverage of Research In Motion (RIMM) with a POSITIVE rating. We view RIMM as a leader in the attractive smartphone category, which we forecast to grow at a 35% CAGR over the next five years (2007-2012) on a unit basis. RIMM boasts dominant share in the North American enterprise market. Furthermore, the company’s burgeoning brand and sleek devices have driven strong penetration of the consumer segment during the past 18 months.
RIMM’s carrier friendly business model has garnered significant marketing support and subsidies from carriers and has allowed the company to build a robust global sales channel with more than 375 carrier and other retail and distribution partners. Avian Securities
Looking forward, we believe RIMM is on the cusp of another strong product cycle with the launch of its new 3G Bold device in 3Q08 to be followed by new touch-screen (“Thunder”) and clam-shell (“Kickstart”) form-factor devices in 4Q08. As such, we are initiating coverage of RIMM shares with a POSITIVE rating and $150 price target and believe investors should own RIMM shares ahead of a strong product cycle set to begin in the next month.
Our price target is derived based on our DCF analysis and equates to 40x our F2009 EPS estimate of $3.78 and 28x our F2010 EPS estimate of $5.40. The 28x F2010 multiple compares to expected top-line growth of better than 40%, suggesting a PEG ratio of less than 0.7x. In the very near term, we would caution that news flow on competitive devices and general macro-economic concerns are likely to create volatility in RIMM shares.
However, we expect positive chatter regarding new RIMM product launches to begin building in the August- September time frame. Longer-term, we view RIMM as well positioned and an attractive secular growth story in the wireless equipment space.
Key Investment Points:
(1) Leader in smartphone category with strong secular growth underpinning.
(2) Robust product cycle gets under way with launch of 3G Bold in August/September to be followed by new touchscreen and clamshell form-factors in 4Q09.
(3) Shares down more than 15% from highs on near-terms concerns over competition and margins due to higher spending on S&M and R&D programs. Provides attractive entry-point with shares trading at less than 23x our F2010 EPS estimate suggesting a PEG ratio of 0.5x.
RIM’s earnings should remain strong near-term thanks to the roll-outs but my thesis has slowly been shifting toward favoring Apple (AAPL-NASDAQ) thanks in part to the “ecosysystem” they are building.
UBS summed up my thoughts nicely in their reco of Apple yesterday…
UBS initiated AAPL with a Buy and a $195 saying they think the Apple “experience,” driven by its ownership of the entire software ecosystem, creates a “sticky” user base that will drive recurring hardware revenue. The firm also says Apple’s unique direct billing relationship with users provides long-term opportunities to enable transactions between consumers and end products. Firm also says low international market share also presents future growth opportunities.
And while the Credit Suisse note on RIM is not as embarrassing as the crap SAI publishes, neither of them are seeing the forest through the trees. This is not a zero sum game, at least yet, and even PALM is showing signs of life.
RIM might eventually fill the gap on the chart, but I am not expecting 52-week highs any time soon. However, there is a lot of hot money coming out of commodity and natural resource stocks looking for a home, and some of it should find its way into the smartphone plays.
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I thought RIM would be dead money after the last earnings call...but moving into consumer market is not the kiss of death despite fanboy commentary. And RIM will continue to have a stranglehold on the enterprise market until hell freezes over.
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Additional highlights from Avian research note:
Customer concentration – We estimate that RIMM’s four-largest carrier partners account for more than 55% of total revenue with its largest carrier partner (AT&T) accounting for more than 20% of revenue. As such, rising competition at these carriers from new competing devices is likely to impact RIMM’s growth.
• Geographic concentration – In F2008 RIMM derived 59% of its revenue from the U.S. market. In addition, we estimate that the U.S. market contribution to growth was modestly higher. Thus, a severe market slowdown and/or rise in competition in the U.S. would likely weigh on RIMM’s growth.
• Margin pressure – RIMM could face margin pressure on several fronts. The rising mix of consumer subscribers and consumercentric devices is likely to way on ASPs and margins. In addition, international markets are likely to become a more important contributor to growth over time, which is also likely to weigh on margins. Finally, the company is facing higher component costs
due to rising materials costs at suppliers. We would also note that the company is currently investing heavily in sales and marketing, to grow the RIMM brand particularly in overseas markets, and in R&D, to bolster NOC and infrastructure capabilities to meet rising demand. This spending is likely to limit operating leverage in the near term.
While RIMM is currently the undisputed growth leader in the smartphone category, we believe competition is set to rise markedly in the second half of 2008. First and foremost, we believe RIMM faces tough competition from Apple’s 3G iPhone, which launched July 11 at AT&T and Apple stores and with multiple other carriers in international markets. It is important to note that RIMM currently generates over 20% of its revenue through AT&T per our estimates.
In recent quarters, we believe RIMM has built up very strong market share at AT&T stores due to the popularity of the Curve ($99.99 price point) coupled with a fairly benign competitive environment. We believe the wind down of the first generation iPhone during 2Q08 also contributed to that benign competitive environment. However, looking forward we expect RIMM to lose share at AT&T stores in the coming months on account of the new iPhone launch, which we would add is at a reduced price point ($199.99-$299.99) relative to the first edition ($399.99-$499.99).
RIMM is also likely to face increased competition at Sprint stores, which we estimate account for roughly 9% of RIMM’s revenue. At Sprint, RIMM will face competition in the near term from Samsung’s Instinct smartphone, which launched in late June with a great deal of fanfare. We also expect to see additional competition from HTC’s highly touted Touch Diamond, which is expected to launch in the 3Q08 time frame. As such, we expect RIMM’s share at Sprint to be fairly capped over the next several months.
We expect RIMM to fare better in the coming months at both Verizon (15% of revenue) and T-Mobile (12% of revenue) as RIMM’s Curve and Pearl devices continue to perform extremely well at these carriers. We also expect the competitive line-ups to remain more favorable at these carriers in the coming months, although we would note we expect HTC’s Diamond to land at Verizon in the 3Q08/4Q08 time frame as well. RIMM’s Thunder device, expected at Verizon stores in early 4Q08, should help to sustain RIMM’s position at Verizon despite competition. RIMM’s Kickstart is also likely to launch in early 4Q08 at T-Mobile with solid carrier support and an attractive subsidized price point.
Net-net we remain optimistic regarding RIMM’s product cycle and competitive positioning in the high-growth smartphone segment, although rising competition in key channels will make share gains increasingly difficult in coming quarters.
RIMM shares currently trade at 32x our F2009 EPS estimate of $3.78 and 23x our F2010 EPS estimate $5.40. We would note that RIMM’s forward multiple has ranged between 30x and 60x over the past two years. 23x F2010 P/E compares to forecasted top and bottom-line growth of just over 40%, suggesting a PEG ratio of 0.5x. RIMM’s current 0.5x PEG ratio is below that of other leading
large cap, high-growth companies in the communications/hardware space, which trade at C2009 PEG ratios in the range of 0.9x-1.2x based on current consensus estimates.
Our $150 price target is derived based on our DCF analysis and equates to 40x and 28x our F2009 and F2010 EPS estimates, respectively. Our target implies 23% upside from current levels.
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Positions
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