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  RIMM: The Stock that Can't Catch a Break

By Chris Coyle
July 01, 2000

Shareholders of Research in Motion (NASDAQ: RIMM) haven't had much to celebrate in the past few months. General market declines, financial worries, and analyst downgrades have all contributed to the downward spiral of the stock price, from a high of 175 3/4 to its current price of 45 1/4. This is a decline of nearly 80% off its highs. Was this thrashing necessary?

It all started in April when Research in Motion announced that it met fourth quarter earning expectations of .05 a share. However, several brokerage firms, including Credit Suisse First Boston, Legg Mason, and Banc of America Securities cut their ratings or lowered their earnings expectations on the stock after the company said in its conference call that sales and marketing expenses would increase over the coming quarters. Investors dropped the stock like a bad habit, sending shares down 30 3/4 to 51 1/4, a 38 percent loss for the day.

The company said this was neccessary to train personell to sell its BlackBerry wirleless e-mail solution and to support new selling and distribution channels, as well as beginning new ad campaigns and increasing research and development.

This move shows how RIM is thinking about its long-term future in the business, not short-term profits, but Wall Street seemed less than satisfied.

Just when the shares began to make a signifficant rebound, another downgrade, this time by C.E. Unterberg Towbin, brought the stock down 10 1/2 to 42 1/2 on Tuesday. Along with the downgrade, they also lowered earnings expectations for the stock.

Then yesterday, after the market close, Research in Motion came out with their first quarter results. The numbers confirmed increasing spending by the company. Earnings came in at zero cents a share, which met expectations. In the same quarter last year, they brought in .03 a share. Sales, marketing, and administration expenses were 10.1 million dollars, more than doubled from last quarter and more than quadrupiled from the same quarter last year. Research and development jumped 22 percent sequentially and 88 percent from the first quarter last year.

Revenues still grew at a nice pace to $27.1 million, up 67 percent from the $16.2 million in the first quarter last year. Sequntial growth was not as impressive; it was up only 5 percent.

More analysts reacted to the earnings announcement. H.C. Wainwright downgraded the stock to a "buy", Goldman Sachs intitated coverage on the stock with a "market outperform", and USB Piper Jaffray reiterated a "strong buy" on the stock.

With all this in mind, investors bought up the stock on Friday as it rose 6 3/8 to 45 1/4, a 16% move.

It does seem a bit suprising to see RIM rise 16% on news of discentigrating earnings because of growing expenses and of many brokerage firms downgrading the stock. Reuters explained the increase by telling of analysts' approval of spending more on sales and marketing to grow their business. I found this to be ironic since it was analysts' disapproval of spending more on sales and marketing that sent the stock down 40% in one day back in April, but I suppose analysts can have changes of heart.

The Future of RIM
This spending plan will most definitely have an effect on its future, short and long-term. The company's earnings will more than likely evaporate thoughout 2002 due to the increasing expenses.

One analyst, Amir Karim said, "On the profit front, we assume that the current year is one of significant investment in the Blackberry business model. Hence, we do not expect RIM to be profitable before fiscal 2002."

SG Cowen Securites analyst Robert Stone said, "You would expect to see the shares respond badly to an estimate cut, but aggressively building the infrastructure and growing the subscriber base should lead to higher recurring revenues in the future. We believe that RIM enjoys a technology lead versus any of its competitors, either in the PDA (personal digital assistant) or the cell phone space. They should exploit that while the window of opportunity is there.''

Despite the unprofitable outlook for the next few years, every analyst covering the stock has given it either a "buy" or "strong buy". They are starting to embrace the plan by RIM to spend now to increase market share and profits later.

This plan seems to be the way to go for RIM. The only concern should be if the increase in sales and marketing do not correlate into rapid growth for them in the industry. This would leave RIM in a very tough spot. So far, however, with revenues rocketing and a hit product on its hands, I have confidence in management to correctly steer the company for the future.

 
 

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