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business newsThink Twice Before Falling for Research in Motion
By
Bob Faulkner Mar 31, 2010 9:40 am
The company is losing some share, ASPs are under pressure, and revenue growth hasn't exceeded cost-of-goods-sold growth in three years.
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I’m certain that some of the reaction is due to the implosion of Palm (PALM). But let’s face it, Palm isn’t the threat to Research in Motion; iPhone (AAPL) and the Androids are (sounds like a 50s doo-wop group).
Research in Motion will be reporting its fiscal fourth quarter tonight after the close and the numbers better be pretty good. Last time at the plate, Research in Motion beat consensus on revenue and EPS, and guidance moved numbers up for the fourth quarter. With that the stock popped 10% the next day but managed to give it all back and more over the following weeks.
See also, Research in Motion Likely to Beat Estimates
When I reviewed the recent commentary from the Street, just about everyone’s expecting unit demand to be strong, but at what price? ASPs are down about 14% from last year and component prices have shifted from a tailwind to a headwind. Add to that some of the market research firms suggesting Research in Motion is losing a little bit of market share in the all-important December quarter. That seems to be confirmed by a Crowd Science survey indicating that, while 90% of iPhone and Android users have no plans to change, 39% of BlackBerry users want iPhones and 34% want Android phones.
If you’re losing some share and ASPs are under pressure, from where I sit I’ll continue to worry about margins. To say that there’s no leverage in the Research in Motion model is an understatement given the fact that year-over-year revenue growth has not exceeded cost-of-goods-sold growth in any quarter during the last three fiscal years. Maybe the fiscal fourth quarter will be a first?
What makes the current thinking on Research in Motion somewhat bizarre is that exiting fiscal year 2006 the company was valued at 2.2 times trailing sales and about 12.0 times trailing earnings. If current consensus for fiscal fourth quarter is correct, after losing 1200 bps at the gross margin line the company is valued at 2.8 times trailing revenue and 17.2 times trailing EPS.
Is the market trying to tell us that Research in Motion’s best days are still yet to come? If that’s the case, I want some of what Mr. Market is smoking.
No positions in stocks mentioned.
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