Research in Motion’s (NASDAQ:RIMM) stock declined by 20% last week after the company disappointed with weak results. Then it slmped further after its 6-K confirmed its deteriorating position in the U.S. market. [1] In our earlier note titled RIM Blows it with Investors Again, Lowering Estimates, we discussed that for the last few quarters, the company continues to give a miss to its own overall revenues estimates. RIM’s bleak situation in the U.S. implies that the major telecom providers AT&T (NYSE:T) and Verizon (NYSE:VZ) are now preferring smartphones based on Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) ecosystem over RIM’s.
We believe that in addition to the revenue loss, the implications for RIM from deteriorating position in the U.S. would be reduced profitability as well. Our $26 price estimate for RIM stock is about 15% above market price.
Implications of Weak U.S. sales
As shown in the above chart, although sales from emerging markets somewhat covered up the loss from the U.S. markets, the main impact from the declining U.S. sales will be reduced profitability. This is due to the fact that emerging markets are price sensitive markets where mobile phone companies usually price their smartphones lower. On the other hand, average pricing for these companies from the U.S. comes out to be higher as the telecom providers are the ones usually bearing the subsidy costs in exchange of long-term contracts with the subscribers.
Gross Margins Could Decline at a Faster Rate
We expect BlackBerry gross margins to decline from 37% in 2010 to 33% in 2011 based on the outlook provided by the company. However, if the trend of exacerbating U.S. sales continues, gross margins could take an even bigger hit in the near future.
You can tweak the above chart to understand the sensitivity of this driver on our price estimate for RIM stock.
See our complete analysis for RIM stock here
Notes:- RIM’s 6-K form filed with SEC, September 19th, 2011 [↩]
