RIMM: investor expectation too high for the stock

It has been a while since I was able to post message. I am having a bit of break from torrid day time job work load.

RIMM has reported its April Q earning result after the market close today. RIMM (Research in Motion) is a famous blackberry handheld email/phone maker that all business men are supposed to be addicted to. We have initiated RIMM last Nov into filthyrich core list as a short candidate.

Previous posts on RIMM:
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The initiated price was $133.61 with TP at $95 a share. Since the coverage in our universe, the stock price has remained extremely volatile. The stock traded anywhere between high 110's to mid- 140's. Ahead of the earning, investors were anticipating another blowout Q and bid its share price to the another all time high level just below $150. Analysts were raising TP and the earning estimates prior to the earning date revised higher. The stock was heading into the earning with very lofty expectation on the revenue, EPS, as well as the sub add metrics. RIMM also needed to guide higher on all financial metrics in order to justify surreal PE that is approaching 32 based on 08 earning number. From a risk to award point of view, the stock had more downside than upside; most of the good story was baked into the share price and RIMM had to almost destroy all the consensus earning numbers to see further buying interest.

The stock is tanking hard after-market. RIMM has failed to exceed on most of the earning metrics. The company reported 930 mil in revenue, a little shy of the consensus number of 935 mil. Some folks were actually talking about company delivering above 1 billion. EPS of 99 cents was just a penny shy of $1 expected. The company essentially came in line with the bottom line number. The sub adds number was 1.02 mil, lower than the company guidance of 1.12 to 1.15 mil. Some estimate called for this number to be as high as 1.2 mil. So this is a disappointing result. The company continues to paint bullish pictures for the coming Q with 1.12 to 1.15 mil sub adds and the revenue number of 1.02 to 1.07 billion. Since there are so many bullish analysts out there, I believe that they will focus on these slightly better than expected guidance number and give defensive remarks tomorrow. This may serve to limit the downside somewhat. However, current Q earning was unimpressive nevertheless and I expect to see a lot of selling pressure tomorrow.

Other than the earning metrics number, I also saw some additional areas of concern for RIMM. Notably, there were signs of inventory build with the channel inventory rising by 250K in Q4. Although RIMM released additional new products this Q, new products failed to improve gross margin which has been steadily declining over last two Q. GM is now below 52% versus 56%. Pearl with lower ASP has a lower gross margin than other RIMM legacy product lines and as Pearl ramps and replaces some older RIMM products, GM continues to erode.

The heart of the argument for higher PE multiple for RIMM lies in the company's ability to go after highly lucrative recurring data plan revenue, especially that associated with corporate customers. However, although RIMM is growing its revenue nicely, high margin revenue may be harder to come by for the company. For instance, the company's hottest selling product Pearl is only seeing 20 to 30% data plan sign up at T-mobile. As RIMM penetrates consumer market, the company could rely too much on the one time hardware sale for growing the revenue. The pitfall of this situation is that hardware is never a high margin business. And as competition hits up with Apple entering the smartphone market in June, it becomes harder and harder to justify the premium multiple that RIMM is getting compared to its competitors such as Nokia, Motorola, Palm, LG, and Samsung.

As a last point, informal SEC investigation in option practice has turned into the formal status. This may also have near term negative impact on the share price.

In conclusion, RIMM has failed to deliver this Q and selling pressure is expected tomorrow. I see stock trading lower, possibly to high 120's before analysts come out and start defending the stock more aggressively. However, with slower seasonal period coming up for the company as well as with increasing hype on Apple iPhone entry, I see few catalysts to own RIMM shares given the disappointing earning performance this Q. RIMM will get the benefit of the doubt this Q from so many analysts who recommended this stock. However, if it repeats similar performance again next Q, it will raise some eye brows and more serious damage can occur to the share price. I continue to stand by my recommendation to take short position on the stock with TP of $95. TP of $95 is arrived by assigning general EPS estimate of $5 for 08 with PE multiple of 20 for the company, which are more appropriate for the well executing hardware tech company.


The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)

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