What Justifies Our $43 RIM Estimate

Research in Motion (NASDAQ:RIMM) stock has taken a pounding in the past few months sliding by more than 50% since the beginning of the year from $58 to around $27 today. It touched a high of $70 in February before its slide. We have a $43 price estimate for RIM stock implying a more than 50% premium to the market price. This view is predicated on the assumption that RIM will turnaround its BlackBerry fortunes and regain some market share from competitors Apple’s (NASDAQ:AAPL), Nokia (NYSE:NOK), Motorola Mobility (NYSE:MMI) and Samsung. This in turn would help boost margins.

Why Has the Market Thrown in the Towel?

Delays in product implementations: In the rapidly changing smartphone industry, product delays are a big negative and can hurt a company’s competitive position. The lack of a strong product portfolio and delays on some of its new BlackBerry models sapped investor confidence who worried that that its market share would continue to slide. In the chart below you can drag the trend line to see how market share changes impact the stock price.

Apple iMessage service a threat to RIM: The competitive edge that RIM had with features like BlackBerry Messenger (BBM), corporate security and push email have all been lost as other smartphones have evened the playing field. The recent announcement from Apple to come up with its iMessage service is a direct assault at RIM’s BBM service, which has been quite popular with consumers. The downside of BlackBerry becoming less competitive is that it will need to compete on price to maintain sales and thus compromise on its gross margins.

PlayBook Issues: RIM launched the PlayBook tablet in April this year. However, to the surprise of many, the company launched this device without the important push email feature. PlayBook’s launch shipped around 500,000 tablets during the first 6 weeks of its launch though analysts report that demand has slowed leading many to lower their estimates. ^[1]

What Supports Our Sanguine View

Migration to QNX operating system could spark a turnaround: RIM plans to migrate to the QNX OS, which is considered to be much better than the BlackBerry OS. This transition should be completed by 2012 and could help turn sentiment in the medium term. Assuming that RIM launches new BlackBerry “super phones” and its new phones gain traction, we believe that RIM can recover some recently lost market share and slow its gross margins decline in the medium term.

Product Strategy: The company will need to manage its expenses going forward by carefully choosing its product portfolio. During the recent earnings release, the company also announced job cuts to streamline its operations by removing redundancies. ^[1]

In another recent development, RIM may have stopped the development of its 10-inch PlayBook 2 tablet to avoid direct competition with the Apple iPad and its new BlackBerry QNX phone scheduled to come out later this year. (See: Why RIM Would Throw in the Towel on Playbook) Given the intense scrutiny on management among shareholders recently, we believe that RIM will be choosier on where it places its bets as shareholders expect signs of improvement in the next 6-12 months. If management can deliver on its promises in the coming quarters, we can expect to see a rebound in the shares.

See our complete analysis for RIM stock here

1. RIM FY Q1 2012 earnings press release, June 16th 2011 [↩] [↩]