Research in Motion’s (NASDAQ:RIMM) gross margins improved during the last quarter. Despite increasing competition with smartphone makers Apple (NASDAQ:AAPL) and Motorola (NYSE:MOT), a higher mix of BlackBerry Bold 9700 and Curve 8520 sales helped RIM boost company-wide gross margins to around 46% for Q1 2010 compared with average margins of 43% in 2009.
Although we believe that RIM’s gross margin on BlackBerry smartphones will continue to decline, we estimate that there could be an upside of 15% to our $75 Trefis price estimate for RIM’s stock if BlackBerry margins remain stable rather than decline as we forecast.
Below we discuss the reasons why we believe gross margins for RIM’s BlackBerry phone division will continue to decline and how there could be upside to our forecast.
RIM Mobile Phone Margins Expected to Decline
We estimate that gross margin for RIM’s BlackBerry mobile phone division was 35% in 2009 and we expect this figure to decline to 28% by the end of Trefis forecast period.
We believe gross margins will decline as a result of:
1. Declining BlackBerry Pricing
BlackBerry Pricing has not declined much for the last few years and has remained stable at around $340. However, in Q4 2009 and Q1 2010, the BlackBerry phone pricing did decline to around $310. We believe BlackBerry pricing will keep declining at a gradual rate to reach around $220 by the end of Trefis forecast period.
Although RIM management indicates that declining BlackBerry average selling prices (ASP) and margins are not always correlated, we believe that a sustained decline in ASP over the long run will have a negative impact on margins.
2. Component Costs Remain High as BlackBerry Introduces New Features
We believe that smartphone competition with Apple’s iPhone, Motorola’s Droid and Google’s Nexus One will push RIM to continue to develop better features for the BlackBerry. Consequently, component prices for BlackBerries will not decline as quickly as BlackBerry pricing and contribute to a squeeze in margins.
15% Upside to RIM’s Stock if BlackBerry Gross Margins Remain Stable
Although we forecast that BlackBerry gross margins will decline to around 28%, there could be an upside of $11 (15%) to the $75 Trefis Price estimate for RIM’s stock if BlackBerry gross margins were to remain stable at 35% over the Trefis forecast period. Margins could remain stable as a result of a mix shift to higher priced and higher margin BlackBerry devices.
You can modify our forecast for BlackBerry gross margins above to see how RIM’s stock could be impacted if margins remain stable. You can also plot the Trefis community forecast for BlackBerry gross margins and see the community price estimate for RIM’s stock using the Trefis Price menu in the chart above.
For additional analysis and forecasts, here is our complete model for RIM’s stock.
