Research in Motion Ltd (RIMM) is the Canadian maker of the Blackberry smart phone and the encryption technology behind it. The company is projected to have revenues of $18.7 billion this fiscal year, practically all of it related to the Blackberry as they are definitely a “one trick” pony. The stock’s 52 week range has been from $43.42-$88.80, and the stock reported earnings on June 23rdof $1.38/share, beating consensus estimates of $1.35/share. Revenue came in a little light at $4.24 billion, but they added 4.9 million new subscribers in the quarter, a 60% year over year increase. So, why did the stock drop $6.65 the next day and proceed down to its lows for the year, down from $144 just 2 years ago? Why is it trading at less than 10x next year’s earnings?
Android and the Apple Iphone are the causes, pure and simple. These two Operating systems have been taking share from Blackberry in the high end of the market, relegating Blackberry to selling lower margin, low-end phones. The Android Operating system became the number one OS for mobile phones in the second quarter, unseating the Blackberry OS after three years. Apple’s smart phone OS is third, but first in the US and Europe, the two biggest markets. In Q2 2010 the overall smart phone market grew 64%, but both Nokia and RIMM shipped only 41% more units while Apple shipped 61% more and the Android grew an astounding 886%. Worldwide overall market share breaks down currently with Nokia at a 38% market share, RIMM with 18%, Apple at 13%, and Android at about 17%, up from 1.8% a year ago. At one point, the Blackberry had a 66% overall worldwide market share in smart phones, and no one had heard of Android or IPhone.
The reason they are losing this battle comes down to applications and design. The Blackberry has always been a very utilitarian product designed by engineers and meant to handle Email and not much else. As smart phones have become more main stream, consumers have demanded better ergonomic design, greater flexibility, and more applications. Blackberry has missed out on all three, particularly applications, where they are way behind thanks to the closed nature of their OS.
They are trying to revive their franchise with the new Blackberry 9800 Torch and a possible Pad device. The Torch is a touch screen Blackberry with a slide out keyboard and the new OS.6 Blackberry operating system. Sales started on Aug 12th, and sales have been lackluster at best. Early indications are that while it is a great upgrade for those who have a Blackberry, it is still not very user friendly, it lacks the “cool” factor of an IPhone, and they still have the issue of very few apps.
Their other rumored product is a tablet device, believed to be called the BlackPad since they recently registered that domain name, and it is scheduled for release in November. Tablets have been around for years, and many companies already have them out, but it is only the IPad that has really taken off, and we seriously doubt if the egg head engineers at Blackberry can really produce a device that can even compete with some of the other tablets already on the market, let alone the IPad.
The most recent issue with the stock has been the headlines of Saudi Arabia, the UAE, and India threatening to block sales unless RIMM let’s them in on their encryption. This rock solid encryption has been a selling point in the past, but these governments don’t like the fact that they can’t read their citizens Emails when they use a Blackberry. As of this print, RIMM had settled with the UAE, Saudi Arabia, and India. It is highly likely that other countries will follow suit. Long term, it seems to only hasten the demise of the Blackberry, as the one key selling point they had over other systems was their security. Corporate IT execs that favor the Blackberry because of that are now more likely to see security as a non-issue, and their employees are clamoring for an Android or IPhone.
The Bull case for this stock is that the company is still growing revenues in a rapidly growing smart phone market, and with 4.6 billion phones worldwide versus about 1 billion computers, the growth potential is staggering since only about 100 million phones are smart phones now. This means there can be multiple players and the Blackberry can be one of those. With a P/E of around 10x next years earnings, this stock is a huge value relative to that projected growth. The new devices will generate new users and increased buzz, thus further turbo-charging that growth. We think the bull case is really just bull!
We will find out tonight after they report earnings where this company is going.
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