It looks like even Research in Motion is being dragged down into the abyss of the financial meltdown (oh, did I mention Washington Mutual is the latest to go under?). Earnings for the Q2’09 were released earlier this evening and with the lowered margins and earnings forecast, the stock got a 20% haircut, down to $78.60US in after hours trading. I’ll point out why I think the sell-off was way overdone and why I think it’s a good time to buy.
First off, the big worry is the headline 47% gross margin forecast for the next quarter, which is a pretty big drop from the 51.3% last year and 50.7% in the most recent quarter. I’ll be blunt. Up to this point, and to and extent even now, it’s been easy sales and money for Research in Motion. In the business crowd that has been RIM’s core market for many years, there simply isn’t another option. There are certainly a few iPhones here and there amongst business users, but now more than ever I see the prevalence of the BlackBerry as I take my morning walk to work. There’s no comparison. It’s almost as if every decently dressed person is holding a BlackBerry.
With 3G devices becoming more prevalent, RIM will certainly face higher component prices. In addition, with the touchscreen Storm/Thunder looming, there are other more expensive components adding to the overall cost. But RIM still has pricing power. Many predicted that the Bold would come in at a lower price than usual to compete against the iPhone 3G, but it didn’t. Yet they still sell out at Rogers. The push towards the consumer market has meant lower average sale prices, but that’s with the result of vastly higher sales numbers. As stated in the earnings report, top line growth is expected to be even better than analysts expect, $2.95B to $3.1B for the next quarter, versus consensus of $2.9B. Sales aren’t the problem.
That’s why I found it hilarious that Jim Goldman wrote something of a self-confirmation article, entitled ‘Apple IS the Issue at RIM‘, regarding RIM’s earnings report. The premise of the article is that the nearly $380 million in sales and marketing expenses combined with the weak earnings forecast shows that RIM is struggling to compete against the iPhone. He also goes on to state that the $380 million figure was ‘an enormous figure no one was counting on‘. Wrong. RIM has clearly been putting more efforts into targeting the BlackBerry at non-business users. This past quarter, RIM launched the multimillion dollar ‘Life on BlackBerry‘ campaign, and for the first time, I’ve been seeing BlackBerry commercials on TV. Given that the sales and marketing expense for the first quarter was already at nearly $330 million, I don’t think $380 million was such a shock to most, well, except Mr. Goldman it would seem. RIM is expanding its brand outside of business. Surprisingly, many classmates I’ve talked to actually want a BlackBerry more than an iPhone. That’s saying a heck of a lot. The visibility is working.
I’m happy to see RIM increase its marketing efforts and expenses, as long as its growing sales at a proportionate rate, which it is. Margins will no doubt will be pressured by lower ASPs to the precise market they’re targeting, but sales growth is very resilient, even in light of the current economic troubles. At under $80, we’re talking about a sub-20 P/E, rapid-growth company. It looks like speculators pushing the stock rather than fundamentals, and I believe one Warren Buffet has made a killing investing in irrationally beat down companies.