Why RIM Is Still A Bargain After 91% Rally

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On November 13th, I published an article on my tech blog titled Here's Why It's Better To Buy RIMM Than AAPL Right Now.  I listed 6 reasons why RIM was a more attractive investment than Apple.

1. BB 10 is appealing and unique; iOS 6 is boring and old
2. BB 10 is on track to have more than enough apps
3. Investor sentiment is near the bottom for RIM but near the peak for Apple
4. Consumers are tired of Apple’s product cycles
5. Valuation
6. Technicals

At the time, RIMM closed on Nov. 12 at US$8.81.  Since then, the shares have rallied 34.85% (as of today's closing price of $11.88).  Meanwhile, AAPL closed at $542.83 on Nov. 12.  The shares closed at $529.82 today, which represents a fall of 2.40%.  

Despite RIMM's dramatic rally from its 52-week low of $6.22, the shares could still have much upside.

1) Technicals

RIMM continues to be in an uptrend.  Its RSI remains strong (at 69.30).  In addition, the 50 DMA is about to break above the 200 DMA in several days.  This is a bullish signal that is closely watched by traders.  When the Golden Cross occurs, more traders are likely to buy the shares.

2) Wave of Analyst Upgrades Likely

Several analysts have upgraded RIMM in the past two months, due to warm reception of BlackBerry 10 by the mainstream media, tech bloggers and carriers.  For example, analysts from Goldman Sachs, National Bank Financial and Scotiabank have upgraded the shares.  However, many analysts still have target prices of $8-$9, which is far below the current market price.  Thus, a wave of upgrades by analysts who are behind the curve would send the shares higher.

3) RIMM is Trading Far Below The Bullish Scenario

A few analysts, including Peter Misek from Jefferies and Gus Papageorgiou from Scotiabank, have outlined a bullish scenario in which RIMM could achieve EPS of over $4 in FY2014 and trade at above $40.  In my upside scenario of $3.5 in FY2014 EPS and 12X forward P/E, the shares would trade at $42.  This would represent an upside of 253.54% over today's closing price.  Thus, RIMM still has plenty of upside potential if the bullish case materializes.

RIM Surges 9% on Bernstein Upgrade and Birinyi Interview

Shares of RIM surged 8.15% intraday in Toronto (9% on the NASDAQ) and closed up 5.53% at C$17.95.  Analyst Pierre Ferragu from Sanford Bernstein upgraded the stock to a "hold" from "buy" today.  However, that upgrade alone likely would have resulted in a 3% rise in the shares.  More importantly, Laszlo Birinyi from Birinyi Associates said on CNBC that RIMM was one of his top 5 picks for 2012.



Just yesterday, Shaw Wu of Sterne Agee downgraded the stock from "buy" to "hold".  Meanwhile, Gus Papageorgiou reiterated an "outperform" rating on the stock, and said it was "absurdly oversold".

Looking Ahead to Q3 Earnings on December 15th

During RIM's Q2 earnings conference call, sell-through was an incredibly strong 13.7 million units.  In addition, even though BlackBerry 7 smartphones had been available for less than a month in Q2, sell-through for the new devices were very strong.  With the well-designed and popular Bold 9900/9930, RIM likely shipped at least 12.5 million smartphones in Q3.  The availability of the Bold 9900 at AT&T also likely provided a boost to shipments.  With Q3 having ended on November 26th, shipments also benefited from the launch of the Bold 9790 in Indonesia on November 25th.  Thus, it would be reasonable to expect the shares back in the high $20's and low $30's in 3 months.
   

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Apple Stumbles With Battery-Gate and Siri Server Crash

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With the launch of the iPhone 4S, Apple is stumbling in a similar fashion to the way it did when it launched the iPhone 4 last year. While last time there was Antennae-Gate, this time there are Battery-Gate, Yellow-Gate, iOS Error 3200, among other problems.

For Battery-Gate, many users have reported that the battery lasts only for 4 hours, even with minimal use of the phone. In terms of Yellow-Gate, many users have reported yellow spots on the screen. This actually occurred with the iPhone 4 as well in 2010. Apple admitted to the problems in the middle of this week, but said that a fix would be weeks away.

Adding to the quality issues, Siri was down for an entire day this Wednesday, when its server crashed. This was in addition to problems users outside the U.S. have had with Siri, in which the location features do not work. Apparently when Apple engineers were testing the iPhone 4S, they only tested the device in Cupertino, California. Thus, they were not aware of the fact that Siri's location features do not work outside the U.S.

Revaluing Apple?

Samsung recently surpassed Apple in the smartphone industry with its latest quarterly earnings report. Samsung sold 23 million smartphones in its latest quarter, while Apple only sold 17.1 million. With Wall Street's preoccupation with being number 1 in the smartphone industry, Apple falling behind Samsung will likely cause its shares to be revalued. However, with people still lining up for Apple products, the big question is not if the shares will be revalued, but when.

Analysts Displaying Herd Mentality to the Extreme

At a time when 49 out of 54 analysts covering Apple have either a Buy or Outperform rating on the shares, they are clearly displaying herd mentality. The analyst from BGC is perhaps the one investors should pay attention to, since he downgraded Apple to a Hold just before the company announced its latest quarterly earnings, and the shares subsequently fell 7% after-hours.

Apple Has Lost its Magic

Antennae-Gate in 2010 taught investors that Apple products were no longer perfect. It also caused many institutional investors to dump the shares, though many other institutional investors bought the shares when the PR nightmare was over.

At a time when many of Apple's customers are in their 50's and 60's, and buying Apple products in the hope of being “cool”, the company has clearly reached its peak. With Steve Jobs gone, Samsung having surpassed Apple and a long list of problems plaguing the iPhone 4S, Apple's magic has diminished. Its shares will be revalued by Wall Street soon enough.

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RIM Earnings Preview: Expect Guidance Raised by up to $0.50 in EPS

On July 25^th, with RIM shares having closed at C$25.19, I wrote that I expected the shares to rise 20% in the next 2-3 months. On August 15^th, with RIM at C$26.59, I increased the target to a 30% upside in the next 2-3 months (to C$34.57). When RIM announces earnings this Thursday, I expect a jump that continues the current rally, and takes the shares to C$56.05 over the next 12 months, an increase of 88.72% (over today's close of $29.70). The following are 5 reasons why.

1. RIM benefits as Samsung, Motorola and Nokia are temporarily handicapped

On August 24^th, a Dutch court banned Samsung from selling Galaxy smartphones across all of Europe effective October 13^th. This ban includes the Galaxy S, Galaxy S II and Ace. With RIM having a large market share in Western Europe, the removal of competition from Samsung will increase demand for OS 7 devices. In addition, it could allow RIM to leverage its dominance in the UK to increase market share in neighbouring countries such as Germany and France.

Meanwhile, Motorola is in the process of being bought by Google. This process usually slows down projects at the company being acquired. Of course, RIM would likely not feel the benefits from this slowdown until about 3-6 months after the announcement (August 15^th) which would be November-February. With RIM expected launch the first QNX superphones in early 2012 (rumours from BGR are indicating before end of 2011) the uncertainty at Motorola could provide RIM a window to strike.

While WP 7.5 Mango is expected to launch in October, and Stephen Elop having stated that he wants Nokia WP devices available before the end of 2011, Nokia's recent record of slow product development makes a 2011 launch unlikely. Elop's strategic mistake of essentially telling the world that Symbian and MeeGo are garbage is significantly hurting sales of Symbian and MeeGo devices.  I expect Nokia's share price to tumble at some point late in 2011, as losses mount. In fact, with WP 7 adoption having been extremely weak, WP 7.5 is unlikely to change Microsoft's fortunes in mobile the way the company hopes. Thus, disappointing sales of WP 7.5 would once again ignite takeover speculation of RIM by Microsoft.

2. Earlier than expected launch of OS 7 devices

When RIM gave guidance of $0.75-$1.05 in EPS for Q2, the low end reflected what would result if RIM missed the back-to-school season completely. However, RIM launched OS 7 devices much earlier than expectations of August 26-31. The first OS 7 devices were launched in Canada August 10^th, India on August 11^th, UK on August 12^th and US Verizon enterprise customers August 15^th. RIM stated on August 3^rd that more than 225 carriers have commenced or completed over 500 certification programs for the 5 new handsets. Adding in the Curve 9350, 9360 and 9370 (announced August 23 and already launched) and the yet-to-be announced Curve 9380 and Bold 9790 makes this global launch even more impressive. 

2. Reviewers and users like the Bold 9900

All 8 new BlackBerry 7 devices launched in August have received excellent reviews and comments from users. The Bold 9900 is particularly favoured, with sell-outs common in the US. This is a stark contrast to the same time last year, when some reviews complained about the Torch 9800 not having a faster CPU. Many non-BlackBerry users have observed that the Bold 9900 is the only other smartphone that has the hardware beauty and quality that is on par with the iPhone 4.

Thus, the Bold 9900 will be able to prevent most BlackBerry users from defecting to Android or iOS. In fact, the device is likely to cause a sizeable number of former BlackBerry users (who currently use Android or iOS) to switch back, and win over many first-time smartphone buyers.

4. Software announcements and launches could boost shares

RIM has been aggressively making announcements in recent weeks, which is part of the recent why the share price has recovered from the 52-week low of C$21.40. For example, RIM launched BBM 6.0 on July 28^th, announced 5 new BlackBerry 7 devices August 3^rd, hosted the first ever BBM Hackathon August 11-12, announced the Curve 9350, 9360 and 9370 on August 23^th and BBM Music on August 25^th. With the share price less than half of the 52-week high of C$69.30, it is likely RIM will continue to aggressively announce new hardware and software. I expect management to at least give updates on major software on Thursday.

Updates on software that could provide a boost to RIM shares include: native email, calendar, BBM for BlackBerry PlayBook, Android Player, BlackBerry Java Player and NDK for PlayBook. What most analysts fail to mention is that the powerful QNX NDK is currently in closed beta. RIM could announce partnerships with major gaming companies (e.g. EA) which would make the PlayBook the best gaming tablet on the market. However, I expect this to occur after Thursday.

RIM is also poised to make a big PlayBook 2.0 launch once most of the above software is available. The Android Player could be a big catalyst for consumers to buy the PlayBook, since they can enjoy both the 200,000+ apps on Android and the multi-tasking ability of the PlayBook QNX OS.

5. Competition from iPhone 4S internationally is over-blown

RIM is already benefiting as the iPhone 4S and 5 have been delayed to early-mid October. The fan-favourite Bold 9900 will likely be able to hold its ground against the iPhone 5. In addition, threat of the iPhone 4S is overblown, as the Curve 9350, 9360 and 9370 (with NFC chips) are major improvements over the best-selling Curve 8520 and 9300. In addition, the all-touch Curve 9380 will compete head-on with the iPhone 4S.  Apple's offering is essentially a 16-month-old product, and is unlikely to undercut RIM's on price. 

 

Conclusion

I expect RIM to sightly beat Q2 consensus of $0.89 EPS and $4.47 billion revenue (I expect $0.93 in EPS and $4.6 billion). However, shares will benefit mostly from a raised guidance for Q3, Q4 and FY 2012. I expect RIM to raise its FY 2012 guidance from $5.25-$6.00 to $5.65-$6.00. This would be a big boost, since the low end would be $0.53 higher than consensus of only $5.12.  Using a forward P/E of 9.5 on FY 2012 EPS of $5.90 (slightly below the high-end of what I expect to be management's guidance on Thursday) I expect the shares to reach C$56.05 over the next 12 months, an increase of 88.72% over today's close of C$29.70.

	Q2 Guidance	Q2 Consensus	My Q2 Estimates
Shipment (units)	11-12.5 million	<12 million	12.3 million
Revenue	$4.2-4.8 billion	$4.47 billion	$4.6 billion
Gross Margin	39.00%	N/A	41.00%
EPS	$0.75-1.05	$0.89	$0.93

	FY 2012 Guidance	FY 2012 Consensus	My Estimated FY 2012 Guidance (to be announced Thursday)
FY 2012 EPS	$5.25-6.00	$5.12	$5.65-6.00

Steve Jobs enraged by new Android app?  http://www.youtube.com/watch?v=U8ufVq5yKWQ

BlackBerry 7 devices to boost RIM's share price

Today, Verizon announced that the BlackBerry Bold 9930 will be available in stores August 25, while Sprint announced that the 9930 and Torch 9850 will be available August 21.  Meanwhile, AT&T announced that the Torch 9810 will be available August 21.

In fact, these 3 BlackBerry 7 devices have been available for almost a week in other countries such as Canada, the UK and India.  On August 10, the Bold 9900 became available on Rogers (some customers purchased it on August 9) while the 9900 and the Torch 9810 were available on Bell on the same day.  In India, the Bold 9900 became available on August 11.  Meanwhile, the 9900 was available in the UK on August 12 from Vodafone UK. 


RIM's Fiscal 2nd quarter ends on August 27, and some analysts have been concerned that the new devices would miss the quarter.  In fact, RIM gave a wide guidance for 2Q of between $0.75-$1.05 because of the uncertainty of when the devices will launch.  The market's consensus had been that the devices would launch in late-August, between August 21 and 29.  RIM's ability to launch the devices over 11 days earlier than expected (and in multiple countries) is certainly a positive, and will allow RIM to sell more devices in 2Q than expected. 

RIM's launch of BlackBerry 7 devices is different from previous launches in 3 ways, which most analysts have overlooked.

1. Simultaneous Launch of Multiple Devices

Unlike RIM's last major launch (of the Torch on August 12, 2010) RIM has launched 3 devices simultaneously (Bold 9900/9930, Torch 9810 and Torch 9850/9860).  This will boost sales by appealing to users with different tastes for screen sizes and presence/lack of a physical keyboard.

2. Simultaneous Launches Across Hundreds of Carriers

 

During RIM's AGM, the company stated that they were engaged in 491 carrier certification programs with 225 carriers worldwide.  This is unlike the launch of the Torch 9800 last August, when the device was available at AT&T on August 12, but users in other countries had to wait several months (which is how most smartphone makers launch devices).  Instead, this time, the BlackBerry 7 devices became available in Canada on August 10, India on August 11, the UK on August 12 and the US on August 21.  Thus, RIM will sell more devices in the current quarter than most analysts estimate.

3. RIM Strengthens Touch Screen Offerings

RIM is significantly expanding its touch screen offerings, an area that was previously lacking compared to Android and iPhone.  All 3 BlackBerry 7 devices launched contain a touch screen.  In fact, the Torch 9850/9860 is a full touchscreen device that will compete directly with Android devices and the iPhone.  This will help RIM reverse its market share loss in the US to its rivals.  In addition, of the 7 BlackBerry 7 devices that will be launched this year, most will sport a touch screen. 

RIM shares will receive a boost

On July 25 (RIM closed at C$25.19 that day), I wrote an article stating that I expected RIM shares will rise by at least 20% in the next 2-3 months on the new devices.  With the earlier-than-expected launch of BlackBerry 7 devices and Google's acquisition of Motorola today, I now expect RIM's shares to rise at least 30% in the next 2-3 months.  With the shares closing today at $26.59, that would put the shares at $34.57. 

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The Biggest Silver Lining in RIM's Q1 Results

RIM's results for the 1st quarter was mixed, and guidance for the 2nd quarter was ugly, but there are several silver linings, with the PlayBook being the biggest one.  EPS in the quarter was $1.33 (beating consensus of $1.32) though revenue was $4.9 billion (missing consensus of $5.15 billion).  However, EPS for 2Q is now expected to be $0.75-$1.05 (lower than consensus of $1.40) and revenue is expected to be $4.2-$4.8 billion (lower than the $5.46 billion expected).  Full year guidance was reduced from the previous $7.50 to $5.25-$6.

There were several silver linings from the conference call.  Co-CEOs Jim Balsille and Mike Lazaridis both attending the conference call was a good effort to sooth investors.  Gross margins for the quarter was also better than expected, at $43.9%.

"Biggest BlackBerry Launch in History"
 
It was also announced that the Bold 9900/9930 will be launching in late August, earlier than the September that was widely rumoured.  Jim Balsille also said that RIM is having the "biggest BlackBerry launch in history" with certification being conducted at 23 carriers right now.  It was hinted that OS 7 devices will be launching quickly one after another, especially since they use the same OS, which speeds up certification.  Thus, while Q1 and Q2 earnings are rough, investors can expect to receive a boost in Q3 and Q4 from what is believed to be 4 BlackBerry launches (Bold 9900/9930, Torch 9850/9860, new Curve and Curve Touch).

PlayBook The Biggest Silver Lining

The biggest silver lining was PlayBook sales.  RIM recorded sell-in of 500,000 PlayBooks in Q1, beating consensus of 350,000.  PlayBook sales in Q1 was from April 19 to May 28.  Thus, at this rate, RIM is on pace to sell 4 million PlayBooks in calendar 2011.  Of course, RIM is launching many services for the PlayBook in the summer, including native email, Android Apps Player, BlackBerry OS Apps Player and Native SDK.  3 4G versions of the PlayBook (LTE, HSPA+ and Wi-Max) are also launching in the Fall.  Thus, PlayBook sales will only ramp higher in the months ahead, which means that RIM will sell more than 4 million PlayBooks.  I expect PlayBook sales to reach 6 million to 8 million in calendar 2011.     

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