Analyst Silliness with Research in Motion

In recent days I have been paying special attention to shares of Blackberry maker Research in Motion (RIMM). The stock is one that had decent earnings this quarter but some investors wanted more, which prompted a pretty significant sell off in the stock. Despite the market having recently made new yearly highs, RIMM shares have dropped from the high 80’s to the mid 50’s. The stock is down several points today after the analyst who covers them for Citigroup downgraded it from “buy” to “sell.”

Skipping the “hold” rating completely is pretty rare on Wall Street, but what caught my eye even more was that the analyst lowered his price target on RIMM from $100 to $50. What happened to make the company worth 50% less overnight in his view? The upcoming release of Motorola’s Droid smart phone.

Call me skeptical of this bold call from Citigroup’s research department. The new Droid is going to be such a huge success that it will translate into a 50% haircut in the value of Research in Motion, which has a stronghold on the corporate smart phone market? Have we not seen dramatic hype surrounding new cell phones recently that only served to disappoint investors? The Palm Pre comes to mind immediately. While it may help Palm get back on the map, the Pre is certainly not looking like a genuine iPhone challenger like many were expecting. Should we believe that the Droid will similarly make a huge dent in RIMM’s Blackberry franchise?

I haven’t made the plunge into RIMM stock yet, but the odds are getting higher each day the stock continues to slide. At a current $55 quote RIMM trades at 11 times 2010 estimates ($4.85 per share), which seems reasonable even if that figure proves too high due to increased competition. Right now I might just be willing to make the bet that the Blackberry retains its lead in the corporate market for years to come. If so, the stock looks pretty cheap here.

How have this analyst’s past calls on the mobile sector turned out? Pretty lousy, which is par for the course on the sell side. Today the analyst upgraded Motorola to a buy and downgraded Palm and RIMM to sell.He initiated coverage for all three back in September 2007. Here is how the calls since then have turned out:

His track record on Palm has been decent; initiated at sell at $8, upgraded to hold at $6, and now back to sell at $11.

How about RIMM? Dismal. Recommended as a buy twice at $99 and $69, and now says you should sell in the mid 50’s.

Lastly, the Motorola record isn’t all that impressive either; hold at $18, buy at $12, hold at $6, buy today at $9.

All in all, the current negativity on Research in Motion looks overdone to me and as a result I am considering a contrarian investment. As always, please share your own thoughts if you care to join the discussion.

Full Disclosure: Peridot Capital had no position in RIMM at the time of writing, but is certainly taking a very close look at current prices.

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6 Thoughts on “Analyst Silliness with Research in Motion

  1. Traciatim on November 2, 2009 at 12:26 PM said:

    If the estimate were to be dropped by 20% thanks to the competition and the EPS went from 4.85 to 3.88 instead would you still be willing to buy it at $55 and 14 times earnings, or would you prefer if you grabbed it somewhere in the $38.80 – $46.50 range to get in to 10-12 times the new earnings amount?

    I really think that RIMM won’t be able to ride the blackberry train for much longer and don’t think the earnings will be there soon with the direction their competition is taking.

  2. I was reading the cut news this morning and thinking along the same lines.

    I too think the Droid success in particular is certainly overhyped. It’s illustrated by a blog entry that hit my inbox the other day: “Motorola returns to profit even before the Droid release”.

    As if it’s granted that the Droid release will turn things around!

    Now, I do believe that in mid to long term Android *is* going to present a great deal of challenge to RIM and BlackBerry. First because of the sheer number of different devices that will employ it, second because Google will continue to push free services on it and finally because it’s going to be picked up by manufacturers and carriers with strong corporate presence like Motorola and Verizon.

    But that’s going to take time. This particular phone won’t be the BlackBerry killer.

    In my opinion it won’t be the iPhone killer either.

  3. Chad Brand on November 2, 2009 at 1:24 PM said:

    If earnings really did dip below $4 in 2010 the stock is probably dead money from here, but below 15x EPS I would still think the risk-reward looked fairly good. I just don’t see 2009 as being the peak in RIMM’s profits. The smart phone market is growing fast enough that competition may slow their growth, but I don’t think it necessarily halts it.

  4. Chad,
    Perhaps RIMM’s decline is linked in with Garnter’s recent forecast that “Android will have moved up the most from 2009 to 2012, from sixth place to second. BlackBerry will have moved down the most, from second to fifth, while iPhone will remain in third position and Windows Mobile will remain in fourth position.”
    Here is one article in this regard:
    Hope this info is helpful.

  5. It’s had a nice little bounce to todays $64, so good call. I think mobile is a huge growth area for the future but what puts me off is the plethora of companies operating in the space. Each is biting at the nexts heals. Some consolidation may be on the cards?

  6. Chad Brand on November 12, 2009 at 9:16 AM said:

    I agree about the competition, Senan. I like RIMM’s brand and their stronghold on the enterprise segment, but other firms clearly have a lot of competitors to worry about. I’m working on a post re: Motorola, for instance, which would be a company I am not very positive on for that reason.

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