Another Canadian view from Globe and Mail: RIM faces big hurdles
Research In Motion still faces some big hurdles
By MATHEW INGRAM
Globe and Mail Update
It's easy to fall in love with a company like Research In Motion. The plucky Waterloo, Ont.-based company
has taken North America by storm with its funky and habit-forming Blackberry handheld (dubbed the
"crackberry" by some Wall Street wags), and the stock is even easier to love now that it has fallen some 80 per
cent or so from its stratospheric peak of $200 last year (although it is up more than 28 per cent this week). But
when it comes to RIM, eager investors should make sure they are thinking with their heads and not with their
hearts.
All eyes may be zeroed in on the company's quarterly results at the moment, but that is already the past —
investors should be focusing on the future, and RIM has some major hurdles ahead of it as it tries to build on its
early success. And when it comes right down to it, should a company that is facing these kinds of substantial
challenges still be trading at almost 500 times its trailing earnings, between 70 and 100 times earnings estimates
for the current year and more than 11 times revenues?
The recent quarterly forecast from fellow handheld maker Palm Inc. gave some indication of the pressures that
RIM is also facing: the PDA company said that its revenues for the fiscal fourth quarter will be more than 50 per
cent lower than expected — even lower than they were in the same quarter last year — and that it expects to
lose 8 cents a share. CEO Carl Yankowski blamed the slumping U.S. economy and excess inventory.
These two factors are really two ends of the same problem: because of the economic slowdown, fewer people
are buying Palm handhelds. Even though they are clearly gadgets (although cool ones to be sure) they still cost a
substantial amount of money if you want the latest model and all the add-ons. Such purchases rarely do well
during tough times. The fewer devices Palm sells, the higher its inventory costs — and cutting prices to reduce
inventory eats into profits. Not a great combination.
Research In Motion argues that it is better insulated from a downturn because its device appeals more to the
corporate market, since it integrates itself with corporate e-mail systems and becomes indispensable to
salespeople and executives. But will companies that spent so lavishly to buy all their staff a Blackberry last year
and the year before be as eager to order more units now? That's a question worth asking — as well as how
RIM's strategy to broaden its appeal to consumers will play out.
RIM boosted its revenues in the year just ended by selling units to America Online, but lost in all the bullish
news - which sent the stock soaring again on Thursday - was the fact that it only added 49,000 subscribers,
about 20 per cent below most targets. Selling more devices is good, but not as good as getting subscribers to
sign up for RIM's services (such as e-mail) and selling the back-end server software and systems to
corporations.
Another aspect of RIM's business strategy that has some large question marks around it is its focus on the
European market — something the company and its supporters have pitched as a major growth area for the
future, with the move towards next-generation (2.5G or 3G) wireless networks. RIM has said it expects to see
significant growth as it offers the Blackberry and various high-speed Web services through relationships such as
its recent co-marketing deal with market leader British Telecom.
But a couple of major questions remain: one is whether the hype about 3G networks will pan out as hoped, and
the other is whether the Blackberry can reproduce the success it has had in the U.S. There are sizeable doubts
on both counts. Just a few months ago, for example, BT's CEO admitted his company had spent 10 billion
pounds too much on next-generation wireless licenses, and that he was skeptical about the speed with which
such networks could be rolled out. The company is looking at cutting its dividend and selling assets to reduce its debt of more than 30 billion pounds.
As for the Blackberry itself, it could face stiff opposition in Europe — this time from sophisticated cell phones
rather than PDAs like the Palm or Windows CE-based devices. That's because the European wireless market is
much farther advanced and more homogeneous than in the U.S. or Canada. While the cellular market in North
America is fragmented, with companies using several different technologies, most European networks use the
same standard (GSM), and services such as instant text messaging are well established and work across
multiple networks and in different countries.
In North America, in other words, a device that allows a user to send a message to another user in real-time is a novelty — in Europe it is not (although it may be a phone). Meanwhile, handheld competitors in the U.S. market
such as Palm, Handspring, Casio and others either already offer or are planning to launch plug-ins and other
modules that will allow their devices to provide wireless instant messaging and "always on" e-mail access similar
to that provided by the Blackberry.
Does all that justify the kinds of multiples that RIM continues to trade at, especially in this kind of environment?
In a word, no. |
