RIMM is a bargain ahead of earnings

After rising over 40% since August 31, shares of RIMM have fallen in recent days.  On Dec. 15, RIMM closed at US$59.18.  It has fallen 7.44% since hitting $63.94 on Dec. 1. 

Many analysts have been issuing bearish reports in recent days ahead of earnings, helping to push shares lower.   However, despite bearish analysts painting a grim picture for RIMM in 2011, they see RIMM performing very strongly in Q3 results that will be announced after markets close today.

For example, analyst Jim Suva from Citigroup is one of the bearish analysts, with a US$55 target price on RIMM.  However, he still sees strong Q3 results, with EPS of $1.62, which is only $0.02 below consensus.

Most analysts see gloom and doom in 2011

Since even bearish analysts are forcasting strong earnings in Q3 and Q4, they are basing their "Sell" ratings on a bearish outlook for 2011 (FY 2012).  For example, according to the Wall Street Journal, Jim Suva of Citigroup stated the following on Dec. 14:

We believe investors may be overlooking RIMM’s smart phone market share losses (15% globally vs. 21% a year ago) which we believe will become more evident in the quarters ahead as Android gains more traction (especially in Europe), enterprises unlock from BlackBerry exclusivity (1H 2011), Verizon (RIMM’s largest carrier at 16% of RIMM sales) getting the iPhone, & what we believe will be a highly competitive tablet market (iPad+Android+white box) resulting in lower margins, developer confusion with & higher costs with RIMM running 2 operating systems.

Suva is also forecast RIM's EPS in 2011 to be $5.12, versus $5.99 in 2010.  Thus, he is seeing a 14.52% drop in earnings in 2011 compared to 2010.  This would be a strong reversal to the 20%+ increase in earnings and revenue that RIMM has been enjoying for years. 

QNX will save the day

However, these analysts do not realize that their fear of RIMM's sales dropping significantly in 2011 will not materialize.  This is because RIMM is expected to begin launching handsets running on the QNX OS beginning in the second half of 2011.

These handsets, some of which will have dual-core processors, will run on the QNX OS that powers the PlayBook tablet.  The micro-kernel architecture of the QNX OS means that it was designed from inception to support multi-tasking and multi-core processors.  It also delivers high performance and is extremely reliable.  For example, it currently powers nuclear powerplants from AECL and Westinghouse, the robotic arm of the space shuttle and unmanned aerial vehicles.

A bargain ahead of earnings

For investors who can stomach the risk, RIMM is clearly a bargain ahead of earnings.  With the PlayBook launching in Q1 2011, RIMM will be getting a completely new revenue stream in the tablet market. 

In addition, the migrating of handsets to the QNX OS means that the drop-off in earnings that bearish analysts predict, will actually not materialize.  With consensus EPS for next year at $6.41, shares of RIMM at $59.18 means a 9.23 times multiple for next year's earnings.  That is a true bargain for investors who see continued revenue and earnings growth of 20% plus in 2011.