From Red Herring.com:
redherring.com
Stocks to watch: give Blackberry a raspberry
By Paul R. LaMonica
Redherring.com, December 19, 2000
Research in Motion
Nasdaq: RIMM
Cool gadget, ridiculous valuation.
Some people never learn, do they? After watching the Wall Street hype machine pump up and subsequently
deflate bubbles in the stocks of Web community, e-finance, e-commerce, business-to-business, and Linux
companies (just to name a few technology fads) over the last two years, you would have thought that investors
would get wise to this game. Guess again.
The latest investing mania is taking place in the stocks of makers of personal digital assistants (PDAs) and other
"cool" wireless gadgets. Handspring (Nasdaq: HAND) and Palm (Nasdaq: PALM) have benefited from this trend,
but one stock in particular that looks absurdly overvalued is Research in Motion (Nasdaq: RIMM), the Canadian
manufacturer of the popular Blackberry wireless email device.
Revenue growth has been explosive for the company: sales increased 57 percent sequentially in its latest quarter.
And Jason Tsai, vice president of research with C.E. Unterburg Towbin, thinks a distribution partnership the
company has with America Online (NYSE: AOL) will expand Research in Motion's customer base. Under the
partnership, AOL will sell a version of the Blackberry with AOL instant messaging capability. Mr. Tsai admits that
the stock has gotten ahead of itself, but he maintains a Strong Buy rating on it nonetheless, because he thinks the
fundamentals are intact.
But here's what worries us. Research in Motion was a profitable company in fiscal 1999 and 2000 but has decided
to dump a lot of money into advertising in an attempt to boost its market share. Now the company is expected
simply to break even in fiscal 2001 after earning 15 cents a share in fiscal 2000.
The brand-building campaign is probably needed because the Blackberry, no matter how many Wall Street traders
swear by it, is still kind of like RC Cola to Palm's Coke and Handspring's Pepsi. Research in Motion had sales of
$119 million over the last 12 months, compared to $1.3 billion for Palm and $173 million for Handspring. Because
Research in Motion will probably have to continue spending aggressively to catch these two, it is tough to
recommend the stock.
In our opinion, Research in Motion is trading at unsustainably high levels -- 358 times 2002 earnings estimates and
34 times 2001 revenue estimates. The fact that the company is not even a market leader makes its valuation all the
more preposterous. Palm trades at about 12 times fiscal 2001 revenue estimates, and Handspring sports a multiple
of 15 times estimated fiscal 2001 sales. Not that any of these stocks are cheap, but a company in third place
trading at such a premium to its larger rivals is a bit odd, to say the least. |
