Tickers in this Article: RIMM, AAPL, AMZN, QCOM, GOOG, MSFT, NOK, MMI
There's a quote in one of Peter Lynch's books that goes something like "it's always darkest before pitch-black." Personally, I like to harken back to the quote that the light at the end of the tunnel is often an oncoming train. Take whatever snarky, pessimistic quote you prefer; Research In Motion (Nasdaq:RIMM) certainly deserves it. An arrogant and mis-run company is now paying the price for its mistakes and shareholders are looking at not only a long road back, but a road that may well lead to nowhere.

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Third Quarter as Expected, But ...
Research In Motion had previously alerted the Street to most of the salient details about this quarter, so the financial performance was not all that surprising, but it was still unpleasant to behold. Revenue fell 6% from last year, on a 1% shipment decline in smartphones. As it stands now, it looks like RIMM's smartphone market share has fallen apart 10%.

Profits were likewise uninspiring. A large inventory charge for the unsuccessful PlayBook tablet messed up comparisons from the prior year and quarter. On an adjusted basis, gross margin fell almost seven points to just under 37%, while adjusted operating income fell about one-third from the year-ago level. (For related reading, see A Look At Corporate Profit Margins.)

... Guidance is Even Worse
Unfortunately, RIMM management managed to make a bad situation worse, with disappointing guidance for the fourth quarter. Perhaps due in part to poor sell-through (the company shipped over 14 million smartphones, but end sales were 13 million), the outlook for handset shipments in Q4 is down 18% sequentially.

Also unfortunate, the company is delaying the launch of the next-gen BlackBerry 10 phone to late 2012. Although the company is blaming this on a chipset, and the new launch does seem to coincide with the expected release of a new chipset from Qualcomm (Nasdaq:QCOM), the analyst at Jefferies believes it may in fact be due to a problem with RIMM's own infrastructure.

Where's the Hope?
Although there is a case to be made that RIMM can turn itself around, it's not going to be easy. The co-CEO's announcing that they'll reset their pay to $1 for next year is a nice gesture, but that still seems like overpayment based on recent performance. Moreover, spending big money on marketing and promotions is not going to solve the company's biggest problems; people simply don't want RIMM phones and would rather buy a phone made by Apple (Nasdaq:AAPL), or a Google (Nasdaq:GOOG) Android phone from Samsung, HTC or Motorola (NYSE:MMI).

Likewise, the decision to stick with the PlayBook is a curious one. The company shipped 150,000 of these this quarter, but that nearly $500 million charge is hardly a positive development. More to the point, can the PlayBook ever compete with the tablets from Apple and Amazon (Nasdaq:AMZN)?

Those aren't the only risks. RIMM is starting to lose prime real estate at its carriers' stores and risks falling off the map. Moreover, Nokia (NYSE:NOK) is bringing out its new Lumia phone next year and looks to be aggressive on pricing. If Nokia and Microsoft (Nasdaq:MSFT) have the right combination for a rebound, that's going to suck more air out of the RIMM balloon.

The Bottom Line
Curiously, although many analysts are down on these shares, taking their own model numbers and running them through a discounted cash flow analysis suggests a much higher price target is in order. So, either the market thinks things are going to get much worse, and analysts lack the courage to forecast dismal results, or analysts are making a call based more on current perceptions than eventual financial performance. (For related reading, see Top 3 Pitfalls Of Discounted Cash Flow Analysis.)

If RIMM can solve its product design and marketing issues, to say nothing of leadership at the top, these shares are likely undervalued. Unfortunately, Nokia shares looked similarly cheap all the way down and the stories have more than a few similarities. Absent a real conviction that RIMM can fix what ails its business, these are dangerous shares to own today.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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