Friday, April 8, 2011


Being someone who appreciates a great valuation, I must post in defense of RIMM. Although there is some good analysis of legitimate risks to the RIM story, mostly focused on competition, I also find that it is now fashionable to be a RIM-hater.

Since the generational low in spring 2009, RIM stock essentially topped out around $85 in early summer 2009, and has gone nowhere since.

This sort of stock performance is usually reserved for boring no-growers, or companies with real issues they are working through. In contrast, RIM has been wildly successful over this period, posting the sort of growth that few companies can ever hope to achieve. Sales are up 62% over that period; units have grown 91%; and the subscriber base is up 114%. Furthermore, RIM is one of the leaders in a huge market with open-ended growth opportunities. The mobile phone market is over 1 billion units annually. The leading smartphone vendors, AAPL, RIMM and the Androids, are still only selling a fraction of the total.

One argument the bears immediately make is that sales are not up as much as units, so ASPs are declining. Fair enough, except this is the story of every high-growth technology product market that ever existed. Your expectation should be that the company can bring down the unit price as the technology matures and volumes boom. Apple is doing exactly the same thing. Be far more fearful of tech companies that do not lower prices! Another ursine argument is that sales growth is in lower-end devices to emerging markets. Again, fair enough, the growth is overseas and RIM is addressing the most robust markets.

The proof that they are doing the right thing is in gross margins, which were supposed to collapse but instead have remained right in the 40%-45% range this whole time.

There is no doubt the smartphone market is getting more competitive, but I can think of few markets in which one company garnered 100% market share. I like AAPL stock and the company very much, but they will not sell every smartphone shipped in the world. Look at those unit growth numbers for RIM again: Since the iPhone was introduced two years ago, RIM has doubled its unit sales. Some people just like the attributes that the BlackBerry offers.

I might erase this whole argument if this stock traded at a multiple that reflected its growth prospects. Instead of being a highflier with a momentum multiple, this fashion to hate RIM has driven the P/E down to 7x this year's EPS estimate. I mean ... really? Even if you discount the bear case, it isn't worth a market multiple?

RIM has gone through these periods before. Mid-decade, the patent suit kept the stock in a flat range for two years, while the business continued to grow. When the cloud lifted, the stock ran from $20 to $140 in one year. We are at a similar junction now. Unless their business completely collapses, sentiment will turn and this stock will have a massive run. My price target is $150 or so. This uses 20% growth on top of this year's $7.50 guidance, meaning $9.00 of calendar 2012 EPS, and a multiple of 18x, a modest premium to the market to account for the growth prospects. That is a 200% gain from current levels, and could happen literally in months IF (that is a big "if") the revaluation happens in the near term. Obviously, if the stock is re-rated next year, the multiple would apply to an even higher EPS number, since by mid-2012 you will start trading off the calendar 2013 EPS estimate.

Inflation is accelerating more quickly than CPI and other measures can pick it up, in my opinion.

When researching potential retail names, do two things:

1. focus on those with comps well above inflation rates; and

2. dig in to see which names have increasing unit volumes and traffic.

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