RIM’s stock tumbles on product delays, increased costs: Downgrades fly amid increased competition from Apple, Google

Investors slammed BlackBerry maker Research In Motion Ltd. for the company’s lowered outlook and product delays ahead of the critical fourth-quarter holiday shopping season, raising questions about the company’s ultimate ability to play in a smartphone market that – with the arrival of heavyweights Apple Inc. and Google Inc. – has suddenly become white-hot.
RIM’s stock plummeted from around $97 per share yesterday to around $72 per share this morning as Wall Streeters digested the company’s second-quarter earnings report. Although RIM’s numbers for the quarter were strong and within expectations, the company’s outlook for the coming quarter came in below investors’ hopes.
The news caused two investment firms to downgrade the company’s stock (though one, Credit Suisse, issued an upgrade).
UBS downgraded RIM shares to “Neutral” from “Buy” and cut the company’s price target almost in half, to $88 from $165.
“With revenue risk from potential product delays, growing concern with regard to consumer and enterprise spending (a strong quarter with leverage would probably have allayed this fear, at least into the next quarter), and competition increasing (at the very least would impact sentiment), we see little near-term to make us more bullish at this time,” wrote Maynard Um of UBS. “We do not see catalysts to drive the stock upward from these levels in the near-term as competition in the consumer market increases from Apple, HTC (the G1 Android should get a marketing push in October), Nokia, and others; visibility to top-line growth is unlikely to improve intra-quarter with growing consumer/enterprise spending fears, and seasonal concerns with regard to sell through and channel inventory could increase post-holidays (a typical industry concern every year end).”
UBS makes a market in RIM securities.
The news brings RIM’s good times to a screaming halt. According to Strategy Analytics, RIM had 4% market share in the U.S. in the first quarter of 2007, a number that ballooned to 11% in the second quarter of this year. According to RIM, smartphones will represent one-fourth of all handsets sold globally this year and more than one-third next year, while handset sales in general are flat. In the United States, RIM has 54% market share in smartphones and about 10% of all devices. And, according to Current Analysis: Consumers now account for 34% of RIM’s customer base and as much as 50% of all new sales.
Such numbers helped to drive RIM’s stock above $140 per share by July, but worries over competition and the increasing cost of keeping abreast of that competition have served to steadily cut into investor exuberance. Today, RIM’s stock is at its lowest point in more than a year.
Ittai Kidron at Oppenheimer outlined the specific counts against RIM in its earnings report:
–“RIM’s new hardware platform for devices such as the Bold and unannounced 3G platforms (read Storm) have higher costs. The company has chosen to eat some of the costs in an effort to maintain pricing, which suggests tougher competition in an uncertain macro environment.”
–“Management noted a product launch scheduled for early fiscal third-quarter 2009 [later this year] slipping later in the quarter with the timing of the U.S. launch of the Bold and Pearl 8220, in particular enhancing its risk profile.”
–“A disappointing earnings outlook for the company’s fiscal third quarter of 2009 with earnings per share guidance of $0.89-0.97, falling short of consensus of $0.98.”
Oppenheimer makes a market in RIM securities.
As for the company’s financials, RIM reported revenue in the quarter of $2.58 billion, up 15% from the previous quarter and up 88% from the same quarter of last year. Net income for the quarter was $495.5 million.
RIM added 2.6 million net new BlackBerry subscriber accounts, bringing its total to 19 million.
Despite the doom and gloom, Oppenheimer’s Kidron offered the bright side: “Despite this, RIM’s growth story remains intact given its strategic value to its 400-plus carrier partners, strong product roadmap and international expansion opportunities. Margin pressure represents a key overhang, but we believe this is an inevitable aspect of a growing market presence and as it continues to evolve into a more consumer-driven original equipment manufacturer. We expect shares to remain range bound in the near term with investors looking for RIM to stabilize its gross and operating margins. Longer term, we believe patient investors will be rewarded as operating leverage returns.”