Research in Motion's Incredible Market Moves
Maybe you got an e-mail on your BlackBerry on November 13 recapping the day's highlights on Wall Street: Shares of Research in Motion, the Ontario-based outfit that makes the ubiquitous devices, soared nearly 10%, to $112.55, in a sharp U-turn from a three-day sell-off that had cost the stock some 23%.
The gain dwarfed the rebound in the Dow Jones industrial average, up 319 points, or 2.5%, to 13,307.09. With moves like that, Research in Motion's stock symbol, RIMM, might as well stand for Really Incredible Market Moves -- especially considering that the stock has doubled in the last six months and is up 164% for the year.
Amazing, yes. But more to the point: How do you know whether to side with the profit takers or the bargain hunters?
That's a tough call, and the answer depends on whether you can withstand any more incredible market moves in the wrong direction, or whether you're able to tune them out to focus on the long-term prospects of a proven market leader in a fast-growing field.
Whichever way you lean, there's never anything wrong with taking some money off the table after such huge gains. If you're lucky enough to be sitting on a windfall, locking in at least some of it allows you to stop fretting about the present and to focus on the future, which looks great in RIM's case.
Research in Motion revolutionized a global, round-the-clock workforce with its wireless e-mail and is now a major force in smart phones, which combine voice and data functions in one streamlined gadget. All told, there are 10.5 million BlackBerry users in 125 countries. For better or worse, some folks find the little keyboards so addictive that users nicknamed them "CrackBerries."
About three-quarters of the company's revenues come from BlackBerry devices, including the newer BlackBerry Pearl and Curve smart phones that appeal to the not-so-buttoned-down set, with a slim design, camera and music player. But RIM also makes money from servicing and licensing the BlackBerry technology to other wireless carriers.
In October, the company reported record results for the quarter ending August 31 (RIM's fiscal year ends in February). Sales of $1.4 billion were up 108% from the same quarter a year earlier, and earnings of 50 cents a share were up 100%.
Moreover, the company told analysts that the outlook for the current quarter was better than most of them had expected, as customers replace their old BlackBerries at a brisk pace, choosing among eight new devices launched since the beginning of the year.
Following the report, some analysts scurried to boost earnings estimates, raise target prices and bump up or reiterate already-bullish ratings.
More recently, Credit Suisse analysts on November 5 upgraded the stock to "buy" from "hold," said the share price could reach $160 over the next 12 months, up from a previous target of $100, and raised fiscal '09 earnings estimates to $3.65 per share from $3.12. Credit Suisse expects earnings per share to grow at a 40% annualized rate over the next five years.
Part of the bullish case for Research in Motion depends on the growing importance of smart phones within the broader cell phone market. Growing at an annual rate of 36% over the next four years, smart phones will account for 19% of handsets by 2010, says Credit Suisse, up from 8% last year. By contrast, the market for regular cell phones is growing at just 7% to 9% a year.
Meanwhile, fewer and fewer human resource departments will be issuing BlackBerries. Businesses account for the bulk of sales. But in the most recent quarter, 32% of new subscribers were "prosumers," working professionals who subscribe or buy on their own, up from 30% the previous quarter. Similarly, North American users accounted for 68% of new subscribers, but the company is expanding in China, Europe and Latin America.
So what took the air out of the stock in early November? Blame it on Cisco Systems (CSCO), whose CEO triggered a sell-off in tech stocks after warning on November 7 of "lumpy" information-technology spending on the part of financial, automotive and retail companies.
Wall Street's interpretation: Tech isn't the safe harbor investors imagined if the economy goes into a tailspin. Cisco, along with other recently battered tech names, rebounded sharply on November 13. Cisco closed at $30.14, up 3.5%, and Apple (AAPL) soared 10.5%, to $169.96.
Despite the impressive rebound, there's still good reason for caution. "Research in Motion is diversified enough to weather shortfalls in financial-services spending, but if consumer demand slows for high-end phones, that could be problematic," says Todd Rosenbluth, tech analyst for Standard & Poor's.
And the company is facing competition for consumers' attention from Apple's iPhone, although for now, iPhone fans favor it for downloads, while BlackBerry users are primarily communicators.
Then there's the lofty share price, which for some is hard to justify, no matter how much they like the company. Rosenbluth rates RIMM a "hold" for that reason. "We think the stock should trade at a premium, but how much of a premium is a matter of discussion," he says.
For him, 35 times his estimate of fiscal '09 earnings of $2.90 a share is more than enough, which is why his 12-month target on the stock is just $100, a price the stock hasn't seen in more than a month. Bear Stearns analyst Andrew Neff can't see Research in Motion deserving a P/E higher than the 27 that he believes Apple's shares merit. Neff thinks a fair value for Research in Motion is $95 to $98.
There's another risk embedded in this skittish market for high-fliers like Research in Motion. Even a minor misstep can result in a pounding. Says one mutual fund manager: "This is not a good market to be slightly off in -- anything short of exceeding elevated expectations is likely to be perceived as a negative and the reaction is really pretty extreme." He adds that hedge fund managers and other investors locking in gains for the year could put pressure on Research in Motion shares.
That might not be a bad thing, at least not for investors looking to buy a premier company at a more reasonable price. "They demonstrate the characteristics of a market leader," says analyst Brian Modoff at Deutsche Bank. "They're extremely good at what they do, and they do it better than anyone else."
If the stock breaks below $90 a share, he says, you'd have to give it a look. Closer to $80 a share and it's a bargain. No one can say for sure whether the stock will retreat that far, or when. But in case it does, you might want to tell your favorite stock-alert service to send a missive to your BlackBerry.