Fool Plate Special: Research in Motion Sickness? RIMM
By David Forrest
----Motley fool agrees with TheTruthseeker on the general PDA market (re HAND report), and TheTruthseeker agrees with Fools assessment of RIMM.-----T
biz.yahoo.com
Friday October 20, 12:13 pm Eastern Time
This year alone, Research in Motion's (Nasdaq: RIMM - news) stock has been as high as $175 per share, traded all the way down to $23.25, and is now back up at $122.50. Talk about a wild ride -- that's enough to make even the steel-stomached investor seasick! A darling of the momentum crowd, Research in Motion (RIM) makes wireless handheld devices that will retrieve your email for you and act as your personal organizer.
The company is competing in the crowded market for personal digital assistants (PDAs) already populated by Palm's (Nasdaq: PALM - news) Pilot, Handspring's (Nasdaq: HAND - news) Visor, and the Psion, among many others. Its flagship product line involves the RIM 957 (hardware) and the service/software component called Blackberry. For about $500 (retail), you can buy the RIM 957 and the Blackberry Desktop software. On top of that, you pay about $50 a month for the ongoing wireless service. What you get in return is the ability to receive your email from most anywhere in the country over the wireless device, in real-time. Neato.
It appears that RIM is doing something right, as sales have risen in the second quarter of this year to $42.5 million versus $19.2 million last year. For the last 12 months, the company has done about $120 million in revenue, primarily fueled by the popularity of the wireless handheld devices and the Blackberry service. When I look at all of this, and when I see the pictures of the RIM 957, the only thing I can think of is "cool!" It seems so James Bondish and ultrahip in our networked world, right? Then again, it also seems like the latest techno "toy."
In and of itself, there is nothing wrong with being cutting edge and having the neatest toy on the block. That's how the Palm Pilot caught on, and many other gizmos before it, not the least of which is the computer you're probably reading this on. My problem with this whole story is that the market is affording RIM a market capitalization of $8.7 billion, or 73 times trailing sales.
As I ponder this fat valuation and look at the key components that will drive value for the company over time, some serious questions come to my mind. Take some Dramamine and strap yourself in.
When you break down the two key drivers of value for RIM, it's all hardware and software/service. The one thing we all know is that hardware is always a low margin business and not something investors will pay a premium for over time. Look around you. Think about the "devices" in your life and tell me where the money is.
Is the money in the phone or the connection service? Is the money in the camera or the film and developing? Is the money in the desktop computer or the software and service? You guessed it, it's never in the hardware. Sure, for a short period of time you'll see the newfangled devices command a premium, simply because they're new. But pricing almost always forces the hardware into the low-margin zone. This leaves RIM with sustainable growth only in Blackberry and the service.
Blackberry's main claim to fame is that it offers wireless, real-time service for the receipt of and delivery of email from the wireless device, most notably hooking into Microsoft's (Nasdaq: MSFT - news) Exchange Server. Unfortunately, the company certainly holds no monopoly over this type of network and there are few barriers to entry for other players in the wireless email market.
Basic cellular phones are getting into the act with wireless email services, and alphanumeric pagers have had text messaging capabilities for a while. I grant you, none of them are as advanced or as cool as Blackberry, but that just says to me that Blackberry is the leading toy manufacturer right now. How long will that last? I have no idea. Maybe it's Monopoly, maybe it's Tickle Me Elmo.
My basic issues with the business model aside, RIM isn't even the market leader: Palm is, by a wide margin. Palm has wireless devices that can synch email with Microsoft Exchange. The real problem with Palm is that it has no naturally attached keyboard (though you can buy add-ons) and writing in that graffiti is just plain awful. Still, RIM would have to overcome an awful lot to take Palm out, while Palm basically has to sit on their, uh, palms and do next to nothing to compete in the space.
So, what's one to conclude from all of this? My takeaway is that RIM better not make a single mistake or it's toast -- and all of the shareholders are toast with it. The company has a neat product and a cool service that has captured some imaginations out there. But, at an $8.7 billion valuation, how much of that is already priced into the stock?
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