Opinion on  Research in Motion Ltd (RIMM)     Sector: Technology  >  Industry: Communications Equipment
iPhone for business

Despite all the hoop-la about the iPhone, everyone seems to disregard the FACT that RIMM has business relationships with just about every wireless carrier in the world. Yet, Blackberry's market share of wireless phones is tiny because the smart phone market segment is the fastest growing category of wireless phones.

Moreover, while the iPhone has certainly rocketed to a nice share of the market in the US, it only represents the US (OK, I’ll throw in Canada). Everyone who suggests that RIMM is overvalued (by virtue of the popularity of the iPhone in the US) seems to miss the point that the market shares gains are in the US only, and they seem to extrapolate that to the rest of the world - where Apple has been very slow to distribute. In addition, if the wireless handset market can't support two very popular smartphones, then that market is pathetic. Among the best things to happen to RIM and Apple is the abdication of the market by almost everyone else. Where is Motorola?, What happened to the PALM whatever – which was supposed to be a major competitor at $99 only 6 months ago. Where is a competitive Nokia model? HTC units continue to appear, but everyone continues to talk about Blackberry and iPhone. Where is everyone else?

With respect to the corporate market, it will be a long time before the largest majority of corporations begin to purchase the iPhone en masse. Everyone seems to disregard the fact that RIM's position in the world of Corporate IT is pretty entrenched. Corporate IT moves more slowly than a receding iceberg.

RIM also has multiple models, and continues to improve their phones SIGNIFICANTLY, each and every year. Apple has one phone model today, and probably another in a month. Finally, you shouldn’t dismiss the Blackberry keyboard. The iphone certainly looks cool, but have you every tried to reply to an email with that thing?

In summary, RIM will around for a long time. It’s growth rate will be quite healthy for some time, and so will the valuation. At this point, RIM is beating its numbers, then raising guidance. Until that stops or slows down, don’t bet against RIM.

I agree RIM will be around for a long time. I agree they continue to improve their phones significantly. However, their high forward P/E assumes that they will continue to grow, not just maintain market share.

The next iPhone will be released much more broadly worldwide, and will hurt RIMM's sales more than expected. It's nothing to do with RIMM being a bad company, it just has to do with there now being a worthy competitor in the market (if you haven't yet, try using an iPhone, it's very enjoyable and certainly counts as a competitor to all RIMM products). I personally see RIMM and AAPL as the only two players on the smart-phone market for years to come (although android is also looking for some market share, which will further hurt RIMM).

What I'm getting at is that while RIMM will do just fine as a company, much of their growth will be limited and their margins decreased by the iPhone, which to me warrants trading it at a lower P/E than it is currently, thus my rating. No analyst is saying this anywhere, but it's obvious to me. Business Managers will look at the pricing structure, speed, and applications offered on both... and it's a tough decision.

Firstly, Android is an OS, not a phone. Google will be looking for hardware partners to utilize the Android OS. In fact, SymbianOS (owned by Nokia) has the largest market share on mobile phones in the world - yet, Nokia's share of the smartphone market is tiny, and their valuation reflects that fact.

Secondly, RIM has been working on reducing the component cost of its Blackberry units for years, and have done so very nicely (note the cost of the newer phones continues to decrease). As a result, due to the much larger volumes, gross margins on the hardware is greater than 50%. The gross margin on IPhone has to lower as the volume is not yet there to support a higher margin. Moreover, Apple has to rely on a much higher subsidy from their wireless carrier partners in order to support a higher margin. This will continue until they can significantly increase their volumes.

Thirdly, RIMM"s forward P/E is not reflective of their earnings growth - which hit 100% YOY in the last quarter, yet the forward P/E is only 34x. Apple PEG08 (PEG calculated for FY08 earnings) is about 1.0x, while RIMM PEG08 is only 0.5x - so RIMM is more inexpensive than Apple. RIMM is more expensive on a FY08 Market Cap to Revenue ratio.

At the end of the day, corporate IT will look at the units that they can best support, and be confident that they can go home at 5pm, rather than being called at all hours of the night to wipe clean an Iphone that got stolen in Russia. At this point, RIM's backoffice software infrastructure is far superior to Apple. A lost unit is locked wiped clean by Blackberry Enterrprise Server (BES), which is RIM software. How does Apple do that?

Finally, I understand that AT&T has asked RIM to delay the introduction of its keyboardless, 3G unit until later this year. I also read some crapola story about RIM having technical problems - which led to the day. I don't believe the latter story. RIM has been making phones for seven years, and have some of the best engineers in the world. They know what they are doing.

In summary, Apple has come a long way very quickly. However, I think its just plain wrong to say that all their market share gains have come at the expense of RIM, or that future gains will come at the expense of RIM. I think that it's more accurate to say that the gains of both are coming at the expense of all the other handset vendors who were invited to the smartphone party, but showed up wearing Halloween costumes.

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