The case for upside in Research In Motion shares

RIM CEO Thorsten Heins and CMO Frank Boulben
By Chris Umiastowski on 15 Oct 2012 05:41 pm
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RIM CEO Thorsten Heins and CMO Frank Boulben

Scotia Capital analyst Gus Papageourgiou published a research report today discussing the potential for upside in Research In Motion shares should the launch of BlackBerry 10 actually go well.

Gus has been covering RIM for a very long time - only a small number of people in the financial community know the history as well as he does. He stayed bullish for longer than the average analyst on this stock, but he's been quite cautious for a while now. He puts out a lot of research looking at the upside scenarios, but he is not ignoring the risks and he's still not bullish on the shares.

So what's in his report?

He points out that Wall Street financial estimates imply that most analysts think BB10 will fail. Naturally, if the Street is wrong, there is a lot of upside to be had. Just last week I laid out my view that RIM needs to get hardware pricing up, and they need to hang onto service revenue.

Scotia, along with most other analysts, are forecasting very low ASP (average selling price) for hardware next year. Scotia has an ASP forecast of $222 per device in fiscal 2014, despite the expectation of a heavier mix of BB10 with initial selling prices of around $600. Just as a reminder, RIM's fiscal 2014 actually ends in February 2014, so it represents about one year of BB10 availability.

I like the approach Papageourgiou is taking here. His official estimates are quite bearish, but he's looking into what happens to the stock if thing's aren't quite so bad. With is forecast of $222 for hardware despite launching BB10, that means RIM has to launch BB10 and then discount it heavily on the back of horrible sales. But what if it actually sells half-decent? He lays out the case for $390 ASP, more subscriber ads, and significantly more revenue and earnings.

In his upside model, Papageourgiou shows how RIM's phone shipments could go from his published estimate of 41.9 million to 56.6 million. Remember that RIM sold about 10 million units last quarter (they shipped only 7.8 million but I'm talking about end-customer purchases here). That's a rate of 40 million per year now. So growing to 56.6 million isn't really anything more than moderate success. But Scotia calculates that this could bring earnings per share to $4.39 versus their official $0.15 estimate.

That's the difference between a break-even business (essentially) and a reasonably profitable business. My take, by the way, is that things will not turn out to be shades of grey like this. It's either going to get way worse (and RIM will be bleeding cash big time), or the recovery model that Papageourgiou suggested in his report could look quite accurate.

Unless I missed part of his report, I don't think he discusses the upside potential for the stock price. He does say that even in the event of a breakup, the shares should be worth more than they're currently trading at. But that's more of a view on downside protection versus the upside scenario we're looking at here.

So I'll put my thoughts out there. Let me pre-frame this by saying it's a big IF ... but if RIM can actually deliver the $4.39 per share earnings in Fiscal 2014 (calendar 2013), then the stock is going to $40 again. Wouldn't that be a satisfying turnaround?

Yes. It would. But let's stay focused on what matters. Execution. RIM is not even close to being out of the woods. They needs apps, they need to release a polished OS on amazing hardware. They need carrier support and effective marketing. They need to hang onto enterprise support.

And if they do it? Wow. The upside opportunity is huge. I'd sure like to see that more than the alternative of a spiral towards break-up value.

43 comments

TheBlackberryUser33

Come on RIM... You can do it! I'll probably buy a few more shares myself....

shabbs

That pic looks like a really awkward high five. Heh heh.

Blackberry_boffin

Without a jet pack with Thor it was always going to be messy. Heh heh.

BennyX

Gus's analysis seems reasonable...

My own prediction is that RIM will only sell 40 million devices in fiscal 2014. (30 million BB7/10 million BB10)

However, RIM will make considerably more money because of the higher ASP of the BB10 devices.

HabsSuck

I expect north of 50 million devices, half BB10

Jimcmf

There are 80 million people looking at upgrading their BB's over the net 2 years. That is 40 million per year, plus another 25 million additional growth rate = 65 million per year minimum. Plus additional BBM revenue ( you should see the NEWLY added BBM functions ).

You do the math.

billsterjito

My fingers are crossed! Go RIM
Make it happen

pick1eberry

I think the ultimate success (or failure) of RIM is going to be in the trenches. In the BEST BUYS the FUTURESHOPS, the SOURCES, the ATT and the VERIZON stores. How BB10 is marketed so that when customers come into these stores they know what they want because they are excited about BB10, and not just some pimply faced sales person who knows *nothing* about Blackberry or BB10 and just wants to sell them an Android or iPhone!

mnc76

I agree. I remember looking for a PlayBook in best buy in the Eaton Centre Toronto and the sales rep literally said "don't but it, it total $hit". And this is after I had told him I was specifically looking for a PlayBook--not shopping for 'a' tablet--but had already made up my mind to get a PlayBook.

Next, there was no instructions on using the gestures, and I literally heard people complaining about how it didn't work or was too hard to use.

But at least those units were ON! 75 percent of the time they didn't even plug the darn things in!

So yes, this is going to be a very key battleground!

mnc76

And *yes*, the sales guy did actually swear ("$hit") in front of my wife an I. Totally caught us off guard!

beavertail2

Marketing has to make it cool!

If BB10 can provide an unsecured/secured split sandboxes for the consumer, like the work/personal split for the Enterprise in Balance.

Consumer can use the secured side for banking, health records, personal IP type trusted apps. Firewalled from the unsecured side where consumer can surf and play. Never need to worry about Trojan Horse attack on the sensitive and personal information. This will solve the cybersecurity issue for the consumer. It is unique and it differentiates.

Consumer gets two virtual smart phones in one. Now that is COOL!!!

Cool will sell to consumer.

GO RIM GO

beavertail2

Marketing has to make it cool!

If BB10 can provide an unsecured/secured split sandboxes for the consumer, like the work/personal split for the Enterprise in Balance.

Consumer can use the secured side for banking, health records, personal IP type trusted apps. Firewalled from the unsecured side where consumer can surf and play. Never need to worry about Trojan Horse attack on the sensitive and personal information. This will solve the cybersecurity issue for the consumer. It is unique and it differentiates.

Consumer gets two virtual smart phones in one. Now that is COOL!!!

Cool will sell to consumer.

GO RIM GO

Jimcmf

I bought my PlayBook on day 1 from WalMart, as Staples was out of stock on it.
The girl behind the counter had no idea what it was that I was trying to buy. She had to call the department manager. \

When I went to the cash, the lady at the cash asked me what it was that cost so much. I told her that it was the NEW Playbook tablet. She had no clue what it was. Then I told her it was like the iPad, but better. She then told me to get the iPad because everyone is buying it. I laughed, and said, "Not anymore"

Blackberry_boffin

How do you feel now?
Foot in mouth?

m23haz

I agree 100%. Nothing angers me more than an instance when I walk into a Verizon store like I did the other day and have 2 sales reps ask me "Why do you still have a BlackBerry". RIM needs to educate these people and fix this fast.

Jimcmf

Verizon?
Are you an American?
The media said that nobody in American has a BB anymore.

I wonder how many people in the eastern countries have Android phones and iPhones. They still don't understand that the tax money that is collected on American phones and software goes to making bombs for blowing up their country. That is why they need to buy Blackberry phones from a peaceful and loving country.

kosmos2503

'They still don't understand that the tax money that is collected on American phones and software goes to making bombs for blowing up their country" Best I ever read here... Very True..!!

beavertail2

Execution, execution, execution.

Stay focus RIM. Differentiate BB10 for consumer as well as enterprise.

Smart marketing is a must.

I know RIM can do it.

Go RIM Go

nabil114

I created a model based on the sales of the Blackberry 10. I want to point out that the Android is the rip-off of the iOS. The Samsung sold already 20 million Samsung Galaxy S3. You need to wonder why the RIM let the Samsung get ahead of them. The other competitors are the HTC, the Nokia, the LG, and the Sony. People like to assume that if they cannot compete with the Apple that they are dead.

If you look at the excel spreadsheet, you will realize if they do not improve the sales of the high-end smartphones. They will not be as profitable as the before.

https://docs.google.com/spreadsheet/ccc?key=
0AsAhkj2e6JcqdGU2OFBaUmxRSHl5S2Y0YkJrR2tLS0E#gid=0

- Rezaur Rahman

abwan11

Right, now we're getting to the nitty gritty of it, that estimate of 4.39 seems very reasonable and doable. If they can pull it off and the stock sees 40, it will see 100 easy. Let's get this ball rolling.

Thunderbuck

Frankly, for FY 2014 if they can pull off $2/share earnings, I'll be very happy.

Personally, I'm not shooting for the moon.

HabsSuck

RIM is trading really cheap right now. I expect a huge quarter when BB10 is launched if Gus predicts a $4.39 eps ,if all goes well ,then RIM will trade north of $ 40. Things aren't as bleak as many try to portray, there are many BlackBerry users with OS 5 and 6, RIM has to get those to upgrade.
Just today I did a bluetooth device search while on the GO TRAIN and 24 smartphones displayed, 16 were BlackBerry's, 3 - 8530's, 4 - 9700's, 3-9780, ect, There is a lot of potential.

morganplus8

No surprise here, RIM can easily sell 56 million phones in Fiscal 2014, timing is everything and I believe there are plenty of us willing to buy the new phone. To sell 20 million BB 10's and possibly more if the other 4 phones are super cool ............. no problem. Remember, they are offering 6 phones in 2013, one of them could be a monster hit! Add to that, if BYOD is as much of a bust as many think it is, there could be a much greater uptake in 2013!!!! The world is not limited to North America.

nabil114

I think it is the important to do well in the North America.

kupfernigk

Important to the share price, but not necessarily important to the survival of the company. Multilingual keyboards and not relaying all your personal data to US corporations doesn't mean much to Americans, but it does to an awful lot of people outside the US. The advanced world market for phones probably totals a billion people of whom under a third live in the USA. So what matters is how much it costs to sell a phone in which markets.
Given the dominance of Apple and a few carriers in the US, a CMO with a world perspective might actually put the US last on his hit list.

Blackberry_boffin

North America influences other markets a lot and should NEVER be ignored.
I also hope RIM has a strategy for China. There is a lot of potential over there.

Nefiasm

.. erm no it really doesn't Americans and people who are totally in love with the US tend to think that but it isn't true. The BB subscriber base is growing... I don't even need to give anymore evidence than that. No one in the UK laughs at you if you have a BB the brand is treated well here.

Camfella

Chris wrote:

"last week I laid out my view that RIM needs to get hardware pricing up, and they need to hang onto service revenue."

No you didn't!

nabil114

They need to do the analyses of the products.

http://www.isuppli.com/Teardowns/News/pages/iPhone5-Carries-$199-BOM-Virtual-Teardown-Reveals.aspx

KCXLT

Anyone else having trouble opening this article on the Playbook? Mine crashes the browser, even after a reboot. I have the latest OS.

Jimcmf

I wonder how many people in the eastern countries have Android phones and iPhones. They still don't understand that the tax money that is collected on American phones and software goes to making bombs for blowing up their country. That is why they need to buy Blackberry phones from a peaceful and loving country.

SparkyBC

Well my Curve 8520 died of course, it would no longer hold out till BB10 hit. I went to the telus store and became a isheep for a few months. I HATE iphone for the short time i use it. Screen won't rotate on pages i assume would like my playbook (example facebook) the list goes on and on.

The telus store i asked where the Blackberry phone are she opened a drawer and was one lonely bold she said had been there for months. She said someone may get one once in a blue moon. The Telus store doesn't even promote BB so unless carriers and the retail chains are 100% onboard, it's not the best way to start with scarce or little stock.

I will be getting a BB10 device as soon as it launches, and for fun will smash the POS iphone and post it to youtube. Will be the last Apple device i will ever own again!

timmy t

How does Fiscal 2014 end in February 2014? Do you mean Fiscal 2013?
Also, the number of phones is not the only important thing. It is the number of $600 phones.

POView

its very possible most are under estimating RIMs turn around (world wide).

BB_Bmore

"should the launch of BlackBerry 10 actually go well."

Sorry but this sounds like it was written by someone who has no faith at all in the launch of BlackBerry10 js

G-bone

My prediction? $200.00/share inside of 3 years...

BBB78

I would err on the side of reasonable growth, it will take a bit for some former disappointed BB-users to turn back to RIM...it will take a bit of convincing... and the media??? well, they are probably the biggest skeptics out there. But IF RIM delivers, and they can't fault the device and the OS (bar from personal preference) well then there is a fighting chance... we will see

Superfly_FR

@chris As usual, very insightful and moderated. Can we quote this (credits+link provided of course) in several blogs ?

zander2652

I've always liked Umi's articles. He has an excellent grasp of both the financial and technology aspects of RIM and it's good to see someone that can analyze both spectrums.

One article that I would want to see from Chris (or any of the other crackberry bloggers) is a list of the advantages of BB10 and why it can achieve that upside of $40 stock price.

Here are some of the reasons that I see why BB10 can succeed:

1. It will be the most fresh OS and it's also potentially superior even over android and IOS.

2. There is still a need for physical key board out there and BBs pretty much monopolize that feature.

3. Immense international popularity.

4. superior security.

5. best email service.

6. opportunities in automotive.

7. possibility of licensing to samsung and other companies.

8. Peek and flow and other BB10 features make it unique from all these similar cellphones.

9. It's capable of true multi-tasking.

10. I read somewhere that their apps are capable of calling in other apps within the program making it more powerful than those apps available for androids and iphones. (I'm not a developer so I probably not explaining this in proper terms)

11. Potentially has the best browser, touch keyboard, camera, screen resolution.

12. Keyboard can predict multiple languages.

13. Easiest to develop for with apps.

14. The hub and the calendar make it easy for people to check stuff.

15. Mini HDMI port.

16. Dual profile for BYOD.

Those are the ones I can think of off the top of my head. It would be really great to see an article from crackberry listing all these BB10 advantages. In my humble opinion, I don't think it will be that hard for RIM to get back to $40 stock price.

Two biggest risks I see are:
1. Extreme competition.

2. Potential loss of those services fee that generate over a billion dollars.

Camfella

Are you kidding me? All Crackberry does is talk about how great BB10 is/will be. I haven't read one negative, it must be perfect!

Rootbrian

Great article, but you've gotta have faith.

ferre_kun

i hope RIM will make more factories in asia&africa to cut the shipping&labor expenses. because there is a huge market there (at least in asia) that currently is owned by samsung galaxy series. iphone is too expensive here it doesn't sell as many as in US&europe. but that may change once foxconn open more factories here. 2 of their new factories here are scheduled to start operational in two months. i expect cheaper and easier to get apple's products by next year.

more factories = cutting shipping&labors expenses = cheaper price -> more sales -> stock price up. or so i hope lol.