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RIMM Due For A Trim
Research in Motion (Nasdaq:RIMM) is back in fashion. Its wireless Blackberry smartphone devices have been flying off the shelves lately and its shares are on a tear, doubling in value since March. I don't want to be called a cynic, but as popular as RIMM may be, I'd say the shares have overshot their mark; it's hard to justify the stock's $73 price tag.
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Looking to Customers
Research in Motion's "buy-one-get-one-free" promotion with Verizon (NYSE:VZ) Wireless was a first-quarter hit, boosting its consumer smartphone market share to nearly 50% in the first quarter and putting it ahead of Apple's (NYSE:AAPL) iPhone.
Of course, with emerging competitive threats, such as Palm's (NYSE:PALM) newly released Pre phone and a whole host of smartphones from mobile titan Nokia (NYSE:NOK), not to mention a lagging enterprise market, RIMM had to look to consumers to regain lost ground.
But RIMM's "land grab" for consumers may turn out to be a very costly move. Those giveaway handsets weren't free to make, after all. Profit margin slippage is a good bet for the coming quarters. (For more, see Dial Up Choice Telecom Stocks.)
Questionable Outlook
As for the enterprise market, RIMM's bread-and butter business, the outlook is less than favorable. We haven't seen the end of the recession's impact on IT budgets. Enterprise additions could slow considerably and possibly shrink as companies reduce their headcounts and cap the number of Blackberry activations.
Meaningful revenue growth over the coming quarters will be challenging. Unless RIMM can slash costs, it will be tough for earnings to grow into its price-to-forward earnings multiple, currently 16 times.
Future Scenario
Now, consider a free cash flow valuation. Last year RIMM produced about $620 million in free cash flow. Let's be generous, and say that that number grows annually by 20% over the next four years, then by 10% through year 10, and 5% for years 11 through eternity. I've also assumed a discount rate of 9%.
This scenario - which asks an awful lot of the wireless messaging specialist - generates a share valuation of $66.40, about 10 points below where Research in Motion trades today. In other words, stock is almost priced for best-case scenario growth. (For more, see Taking Stock Of Discounted Cash Flow.)
Of course, it could happen, and I am more focused on what Research in Motion must do to warrant its current price than trying to pin down a target price. But, even if Research in Motion does manage to deliver these numbers, they won't be enough to merit its stock value.
Bottom Line
For those who reckon that Research in Motion can grow its free cash flows at 20% per year for the next five years and at double digits for five more years after that, there might be a tad more value left in the shares. However, I have my doubts.
IN PICTURES: 20 Tools For Building Up Your Portfolio
Looking to Customers
Research in Motion's "buy-one-get-one-free" promotion with Verizon (NYSE:VZ) Wireless was a first-quarter hit, boosting its consumer smartphone market share to nearly 50% in the first quarter and putting it ahead of Apple's (NYSE:AAPL) iPhone.
Of course, with emerging competitive threats, such as Palm's (NYSE:PALM) newly released Pre phone and a whole host of smartphones from mobile titan Nokia (NYSE:NOK), not to mention a lagging enterprise market, RIMM had to look to consumers to regain lost ground.
But RIMM's "land grab" for consumers may turn out to be a very costly move. Those giveaway handsets weren't free to make, after all. Profit margin slippage is a good bet for the coming quarters. (For more, see Dial Up Choice Telecom Stocks.)
As for the enterprise market, RIMM's bread-and butter business, the outlook is less than favorable. We haven't seen the end of the recession's impact on IT budgets. Enterprise additions could slow considerably and possibly shrink as companies reduce their headcounts and cap the number of Blackberry activations.
Meaningful revenue growth over the coming quarters will be challenging. Unless RIMM can slash costs, it will be tough for earnings to grow into its price-to-forward earnings multiple, currently 16 times.
Future Scenario
Now, consider a free cash flow valuation. Last year RIMM produced about $620 million in free cash flow. Let's be generous, and say that that number grows annually by 20% over the next four years, then by 10% through year 10, and 5% for years 11 through eternity. I've also assumed a discount rate of 9%.
This scenario - which asks an awful lot of the wireless messaging specialist - generates a share valuation of $66.40, about 10 points below where Research in Motion trades today. In other words, stock is almost priced for best-case scenario growth. (For more, see Taking Stock Of Discounted Cash Flow.)
Of course, it could happen, and I am more focused on what Research in Motion must do to warrant its current price than trying to pin down a target price. But, even if Research in Motion does manage to deliver these numbers, they won't be enough to merit its stock value.
Bottom Line
For those who reckon that Research in Motion can grow its free cash flows at 20% per year for the next five years and at double digits for five more years after that, there might be a tad more value left in the shares. However, I have my doubts.
by
Ben McClure
Ben McClure is a long-time contributor to Investopedia.com. A specialist in preparing early stage technology ventures for investment and the marketplace, Ben manages the Business Incubator at the University of Malta. Ben was a highly-rated European equities analyst at London-based Old Mutual Securities, and led new venture development at TEC Edmonton, a major technology commercialization consulting group in Canada.
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