RIMM: Growing in Value

I am amazed at the line forming to attend the funeral of Research In Motion (NasdaqGS: RIMM). In just one week we have a Citigroup (NYSE:C) analyst downgrade and The Wall Street Journal warning about the growing competition from Google (NASDAQ:GOOG) Android software for smartphones from Motorola (NYSE:MOT). Then TheDeal.com suggests RIMM could be taken over.

RIMM has responded by announcing the buyback of $1.2 billion of its shares. The message from the firm by this action is clear. It believes its stock is cheap and so do I. Analysts are expecting an increase in both revenue and earnings this quarter and next year. However, they are predicting a slowdown in growth rate. A big point, they are predicting growth. The big questions at the brokers right now, are how much of a slowdown will we see and how will the forecast for next quarter be handled?

A major source of anxiety is currently coming from the impact of increased competition. Reality, RIMM has always had its products sold side by side with competitors. Verizon (NYSE: VZ) already offers Android handsets, AT&T offers the iPhone and T-Mobile offers a multitude of handsets. The real losers over time will be the manufacturers not focused on designing and selling smart phones. Firms offering lower-end handsets have already seen commoditization and margin erosion even in an expanding market. Also note when it comes to have its products sold in a multivendor environment, RIMM is a cash cow for the carriers. None of the carriers are going to throw RIMM under a bus for the Driod. They have already proven that can sell both successfully.

I do not for a minute believe that RIMM will out-sell Apple (NasdaqGS: AAPL) to consumers. I also believe Google (NasdaqGS: GOOG) can innovate swiftly and maybe one day take some meaningful share away from AAPL. However, GOOG does not have both hardware and software control the way Apple does. Droid and iPhone will be an interesting competitive case study in innovation and product advancement. RIMM, despite competition from AAPL and Android will grow in 2010 due to the relatively modest global smartphone penetration of roughly 15% of overall handsets.

It is also reasonable to expect RIMM to benefit from the return of enterprise spending both in the US and abroad, which has been largely absent from the growth side of the company’s revenues over the past six quarters. This could be a game changer in 2010.

RIMM remains the best positioned pure play in smartphones. This far into its quarter it is reasonable to assume that the firm is tracking within its guided range of $3.6 - $3.8 billion in revenues and 4 – 4.3 million new subscribers.

The pace of revenue is directly tied to margins which is another concern of analysts. Although margins will probably not be expanding this quarter I believe if the number of new subscribers is near plan and that margin erosion will slow down or stop.

Despite its stogy reputation, R&D and innovation is not asleep at RIMM. Over the summer it acquired Torch Mobile, a mobile Web tools developer and there is plenty of internal projects in progress.

Most analysts have a price target far higher than the stock is now. I am a holder waiting to be vindicated at earnings which are coming in just over a month. It is hard to believe that a more commoditized firm like Nokia (NYSE: NOK) has the Street assign it a multiple double that of RIMM. From my calculations, RIMM’s P/E and PEG ratios have been knocked so low and the company is so profitable, perhaps we need to start viewing RIMM as a major value.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long RIMM, AAPL, GOOG, T and VZ.