Since the initial shock of Research In Motion's disappointing quarterly earnings numbers last month, a number of investors have tried to call a bottom and point out how cheap are the company's shares. They shouldn't.
Although the stock could see a slight short-term rally from here, expect the shares to come under renewed pressure in the fall. On June 24, RIMM shares took a dive after it announced its earnings. They sold off from $58 pre-earnings to just below $48 on July 6. Since then, and timed with the general market rebound, the stock price has recovered to $55.
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Amidst the sell-off, there were many RIMM bulls who made the rounds on television talking about how "irrational" the market's negativity on the stock was. Here are some of the arguments they made at the time in defense of the stock and why these arguments don't hold water.
Lofty Sales Projections
RIMM sold 11 million devices in its most recent quarter and surpassed the 100 million mark for BlackBerries shipped. The RIMM bulls find it hard to fathom that a company selling so many devices will not continue selling the same number on an ongoing basis.
I have one retort to that point: Remember the RAZR by Motorola? RAZR, of course, was a runaway success of a phone for most of the last decade.
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The iconic phone, which was introduced by former CEO Ed Zander in 2004, enjoyed a great four-year run and sold 110 million units over that time. But no one uses a RAZR today.
I'm not saying BlackBerries will disappear in two years, but it is clearly on the decline, as RAZR was in late 2007. With all the speculation about whether Apple will have difficulty surpassing the $250 billion market capitalization size, no one has yet asked: will BlackBerries hit a wall after they ship their 110 millionth device like RAZR did?
A Lock on Enterprise
BlackBerry bulls often talk about the security of these devices and how they are beloved by enterprise IT managers. They point out that enterprises have written apps for the BlackBerry, making the devices sticky.
While RIMM is still very popular with business users, there are two important points to make:
(1) the future growth of the mobile device market will be fought in the consumer space, not the enterprise one, and this is where RIMM is severely weak (see Pearl and Storm shipped device numbers for proof) and where Apple and Google's Android are strong;
(2) there are indications that the enterprise is starting to give their users more choice of devices.
On its recent earnings call, Apple's Tim Cook said that half the Fortune 100 had already begun iPad trials. He also indicated more headway in general in the enterprise space for iPhone. During a conference last May, Steve Jobs said Apple does best when consumers get to select their products versus when IT managers select for them. To the extent that this is a burgeoning trend that will continue, it's very bad news for RIMM.
Business Users Prefer the Tactile Keyboard
RIMM is a very effective email device. That was its initial purpose and it will always have that draw for power-user business types. Yet, because it's done email so well, it's never learned how to do everything else (browsing and apps) well that users (consumer and business) expect in a device today.
RIMM's success to date has covered up this blind spot. Now, in the last four months, it's been widely noticed versus iPhone 4 and Android devices but guess what, you can't snap your fingers now in Waterloo and expect that to suddenly change.
RIMM is selling at 9 times this year's earnings and 8 times next year's. For most S&P 500 companies, that valuation would signal a screaming buy -- but not in the face of slowing growth.
The question that is critical for RIMM, Amazon, Netflix, Apple or any high-growth company is what is the future growth rate for the next five years.
If it's straight up, you get an Amazon-like multiple. If it's flat, you get a much lower one. The market is signaling that RIMM will be a niche business user tool in the future. It's not cheap, if it's going to see shrinking device volumes and contracting multiples.
A New Operating System
RIMM bulls seem to acknowledge that their operating system (OS) has been vastly inferior to iPhone and the (still buggy) Android OS. But they pin their hopes on the new OS 6 coming out later this summer. It looks better and it might breathe some temporary new life into the shares for a few days, but ultimately it won't solve the problem of a lack of applications running on BlackBerry.
IPhone now has over 200,000 apps built for it; Android has 70,000 apps (and rising); BlackBerry (as of this time last year) had a whopping 2,000 apps. If you were an app developer, where will you spend time building a new app?
Exciting New Devices
On the last earnings call, RIMM co-CEO Jim Balsillie was curiously confident in talking about RIMM's future. He talked cryptically about how the new devices being worked on by RIMM's engineers were going to excite customers.
He promised we'd see some later in the summer. The potential "game-changer" he's likely referring to is the Slider (which has had photos leaked out on the Web like this one ). It's going to combine a large touch screen with the unique RIMM keyboard. This is a perfect example of how engineers think.
Cram more features together in one device. It's obvious that the phone looks large and clunky. These kinds of slider devices have been tried and have failed.
In my opinion, most consumers are likely to prefer the more intuitive and elegant iPhones and Android devices. If users are already complaining about the Motorola Droid's size, how are they going to like the Slider?
The bottom line is that RIMM is heading quickly towards a niche device classification with a smaller price-earnings ratio as a result. No amount of Bolds, Storms, Sliders or RIMM tablet devices are going to save them, either.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.
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