A RIM Tablet Risks Additional Downside to Stock

Research in Motion (NASDAQ:RIMM), which competes with Apple (NASDAQ:AAPL), Nokia (NYSE:NOK) and Google (NASDAQ:GOOG) in the smartphone market, is expected to release a tablet device for the first time according to a recent report by the WSJ.

Although RIM has not confirmed its intent to launch a tablet device, such a move would not be surprising given that its smartphone competitors are launching tablets and supplying operating systems for other tablets.

We believe that a RIM tablet may have potential to succeed amongst business customers; however, RIM may struggle with winning over consumers.  The risk for RIM is that the additional money spent on research, development and marketing for a tablet that may not ultimately succeed diverts resources away from the company’s core smartphone business at a time when smartphone competition is rising.

Appeal to Security and Business Productivity

RIM’s BlackBerry smartphone rose to prominence by helping businesses to better connect with mobile workers.   The device was designed to enhance worker productivity while meeting the security demands of corporate IT departments.

The core factors of productivity and security are expected to be the main selling points for a RIM tablet.  Such a tablet could fill the gap between a smartphone and a notebook PC by making it easier for business users to read and edit business documents (PDF, Word, Excel, PowerPoint).   Combined with RIM’s reputation for mobile security, the company could have a strong value proposition for businesses.

Priorities Different for Consumers

However, if RIM were to target consumers with its tablet rather than businesses, it would need to improve in two areas in order to raise the likelihood of success:

1.  Touch Screen Aesthetics and Functionality

A tablet requires a well designed touch screen interface for it to succeed and the bar for such functionality has been high since the introduction of Apple’s iPad.  Apple has excelled at touch screen interfaces (iPhone, iPad) while RIM has been focused primarily on smartphones with physical keyboards and has had not much success with touch screen smartphones. RIM’s only touch screen phones Storm and Storm 2 have gained limited traction, and we believe RIM’s touch screen technology could be a hindrance to its tablet’s success.

In another article, we discussed that although RIM claims to have a better touch screen functionality in the upcoming version 6.0 of its BlackBerry operating system, it is still uncertain if it will be able to compete against devices like the iPhone and Android-based smartphones.

2.  A Bigger Apps Ecosystem

We believe that having a large app inventory becomes more important for targeting consumers as opposed to businesses.  Consumers are likely to have a wider range of interests in how they use their tablet and having a broad inventory of apps becomes an important factor in satisfying consumer needs.

Apple and Android-based devices have large app ecosystems.  Apple has around 225,000 apps while Android-based devices can access an inventory of 50,000 apps.  In comparison, RIM has only around 7,000 apps its apps store.

Tablet’s Failure Could Affect RIM’s Operating Margins and Hurt its Stock

RIM will have higher R&D and SG&A costs as a result of developing a tablet and these higher costs can have a negative impact on RIM’s stock if tablet sales do not perform well.   We forecast that RIM’s R&D as a % of Gross Profit to increase from around 13% in 2009 to 16% by the end of Trefis forecast period and SG&A as a % of Gross Profit to remain stable at 28%.

A 1 percentage point increase in R&D and SG&A costs could have a downside of around 6% to the $76 Trefis price estimate for RIM’s stock.  You can modify our forecasts below to estimate the potential downside to RIM’s stock if a RIM tablet were not successful.

You can see our complete model for RIM’s stock here.