Analyst Mike Abramsky of RBC Capital has issued an extremely thorough report on his vision of where the smartphone industry is headed, and he likes what he sees. He expects the number of smartphones users worldwide will triple by 2012 representing 35% of total handsets, which will mean huge returns for investors of the markets best known smartphone makers Apple (AAPL), Research in Motion (RIMM), and with less certainty Palm (PALM). Focusing specifically on RIM, Abramsky upped his price target to $150 from $100. So, in effect this analyst is expecting RIM to more than double from where it began the day. Furthermore, his price target is more than $40 greater than the next highest of the 35 analysts covering the stock. Now that is a bullish call with some teeth! However, it is interesting that Abramsky is not the most aggressive analyst in terms of profit per share estimates, so he is expecting to see significant multiple expansion.
While this analyst has stated a strikingly bullish stance on Research in Motion and other smartphone makers, he is not alone. Jim Cramer has been advocating investing in any company associated with what he has termed the mobile internet revolution. Abramsky and Cramer are in agreement that the smartphone has the potential to be the biggest “game-changing” technology since the PC. Analyst and commentators calling for extremely impressive numbers based on a new and exciting technology; where have we seen this bubble before?
Of course, this sort of question will start to appear after such an extremely optimistic view from analysts and market commentators, but could this be a miniature version of the internet bubble that burst in the early part of this decade? Time will tell, but the difference at this point is that RIM and Apple devices are extremely profitable. The internet bubble was a true bubble in the sense that the price-earnings ratios were not even close to being justifiable on a historical basis. Furthermore, the devices continued to sell extremely well even in one of the most difficult periods in consumer spending in recent memory. While the jubilant outlook of Abramsky is reminiscent of the internet bubble, there are some major differences as far as we can tell, and the run up in prices has not been egregious compared to the rest of the market.
The stock is trading about 4% higher in mid-afternoon trading. At Ockham, we upgraded Research in Motion to Undervalued as of our report last week because the fundamentals remain strong and the price has come back to pretty attractive levels recently. RIMM is currently trading below its historical ranges of price-to-sales and price-to-cash earnings, which is a major piece of our analysis. We also like the impressive balance sheet, and no long term debt. According to our methodology, we believe that RIMM could trade somewhere around $130 based on the impressive strength of earnings and sales growth. So, we may not be quite as bullish as Abramsky, but we do think that this is an extremely attractive stock anywhere below $85.
