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Tickers in this Article: RIMM, AAPL, GOOG, NOK, MOT, VZ, MRVL
Research In Motion (Nasdaq:RIMM) would not be the first company to largely invent a market, only to see latecomers take the business away from them. Although it is absolutely fair to debate whether RIMM's Blackberry "invented" the market that Apple (Nasdaq:AAPL), Google (Nasdaq:GOOG) and Motorola (NYSE:MOT) are profitably exploiting now, the more relevant question is whether RIMM can withstand the battles in the market and remain a top competitor. After all, Nokia (NYSE:NOK) was seen as a leader once, too.

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A Bright Quarter With A Dark Shadow
In many respects RIMM delivered a fine quarter. Revenue rose 40% from last year (and 19% sequentially) to almost $5.5 billion, with handset revenue and shipments increasing by similar degrees. Given that RIMM surpassed the average estimate and was close to the high end of the range, that would normally be good news. On the other hand, U.S. revenue dropped 16% sequentially despite an aggressive promotion of Torch at AT&T (NYSE:T) and channel inventory ticked up - while either of these events on their own may be no problem, the combination is a valid reason for concern.

Nevertheless, profitability at RIMM is still good. Gross margin improved almost a full point from last year (though declined more than that sequentially), and operating margin was modestly better. All in all, operating income rose 42% from last year (and 16% from last quarter), while net profits rose 45%. RIMM also did well from a cash perspective, adding about $450 million in cash to the balance sheet.

So ... Now What?
The ever-present worry with RIMM shareholders and analysts is whether some combination of Apple, Google and "other" will put this company in the tech version of the old folk's home and relegate them to the sort of slide that doomed Nokia and Ericsson (Nasdaq:ERIC) as non-US growth stocks. To a point, it is a valid worry - there is that matter of sequential U.S. revenue decline, as well as the fact that Apple and Android-based phones have been gaining share over time, coupled with the impending threat of Verizon's (NYSE:VZ) launch of iPhones.

But maybe investors should not obsesses so much about the U.S. market. Yes, the U.S. market for phones is huge, but it is also very different than the world market as whole. Outside of U.S. borders, it is not common for cell phone companies to subsidize handsets and Nokia still has a very sizable share. RIMM's Blackberry actually stands out, then, as an intriguing and cost-effective option. It is somewhat more expensive than feature-poor Nokia, but quite a bit cheaper than Android phones or the iPhone. That is not to say that the U.S. market is going to change and become like the world market, but it does suggest that RIMM can still compete very effectively on a global basis and use the proceeds to fund R&D to stay in the race in the U.S. with its rivals.

On top of that, there is the question of the tablet opportunity. RIMM has certainly talked up its PlayBook, but RIMM is hardly the only company suggesting that their tablet will be a killer product. Investors have heard similar stories from the likes of Samsung and Dell (Nasdaq:DELL). Still, it would seem hasty to dismiss RIMM entirely in this market. This could represent some upside for the company and key suppliers like Marvel (Nasdaq:MRVL)

The Bottom Line
RIMM certainly does not look like it gets its due on the Street. In fact, the stock may be undervalued by close to 20%. To arrive at that conclusion, investors have to expect that the company will basically produce no free cash flow growth over the next five years (as declining free cash flow margin offsets revenue growth) and then mid-to-low single-digit growth after that point. In fact, go a step further and assume no free cash flow growth again (at all) and a market-neutral discount rate, and it would seem that there is maybe $5 or $6 of downside in the shares.

Of course, if the company goes the route of Nokia, flat free cash flow may be an optimistic case, but that is the risk that goes with all investing. For investors who believe that RIMM can stay in the game, however, and grow in the face of tough competition, these shares may yet have some lingering value to attract to new investors. (For related reading, also take a look at A Look At Cell Phone Companies.)

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