By now, we have all heard the reasons why Research in Motion (RIMM) is doomed and their stock is overvalued. For starters, Blackberries are facing an ever growing number of strong competitors from the iPhone (AAPL), the Pre (PALM), and now the Droid (MOT) among others. Not to mention, RIM’s biggest market of enterprise customers have been shedding employees rather than hiring, and the consumer market has never been RIM’s strength. The average unit selling prices of Blackberries have tailed off significantly in recent quarters, and that will eventually dampen their profit margins. While each of these reasons is widely known and there are surely more bearish arguments not listed, Research in Motion is not yet prepared to wilt to the conventional wisdom.
Research in Motion reported fiscal third quarter results after the close on Thursday and the company easily beat analysts’ estimates and offered up improved guidance. Analysts were anticipating earnings per share of $1.04 on revenue of $3.78 billion, but in actuality the company earned $1.10 on sales of $3.92 billion. In the last quarter, RIM shipped 10.1 million
Blackberries and had a net subscriber gain of 4.4 million. Growth in the quarter was impressive and the stock is soaring more than 12% in after hours.
Furthermore, RIM’s management was optimistic going into the final quarter of their fiscal year saying they are seeing a strong beginning to the holiday buying season. They are anticipating 4.4 million to 4.7 million subscriber growth which will lead to sales of $4.2-$4.4 billion and EPS in the range of $1.23 to $1.31. Also, they see margin expanding significantly to 43.5% from 42.7% in this quarter. If RIM is able to achieve anywhere near the growth that they have projected in the quarter, they will finish the year with well over 40 million subscribers worldwide. Clearly, this is what CEO Jim Balsillie was talking about when he referred to his firms “land grab” strategy in previous quarters, and it has not adversely impacted profitability as so many analysts had feared.
The negative sentiment swirling around Research in Motion had brought the stock very much out of favor with the market. RIM has woefully underperformed the competitors mentioned earlier over virtually any timeframe in the past year. At Ockham, we continue to believe that RIM is Undervalued, and even after the run-up in after hours it presents an attractive opportunity to investors. RIMM continues to trade at a price level that places price-to-sales and price-to-cash earning levels below what the market has historically been willing to pay.
Surely, some who read this will fall back on the same arguments that have kept this stock depressed for some time, and it is their right to come to their own conclusion. However, I would remind them of the words as a wise man once told me, “Conventional wisdom is an oxymoron.”
