RIM: What do broker changes really mean?

by Chris on November 22, 2011

Blackberry logoWatching RIM’s stock price is not something I do on a daily basis. In fact it’s not something I ever did on a daily basis even as a sell side analyst. The day to day crap just isn’t that important to me. And there really hasn’t been anything that important happening to affect my view of the stock. So I’ve been busy doing other major projects and blog posting has been too quiet. Sorry about that!

Anyway, we’ve been seeing a lot of commentary out of Wall Street lately. We’ve seen broker rating or target changes at GMP, JMP, Morgan Stanley and Canaccord Genuity. I’m sure there are a few others I haven’t seen. If anyone wants to send me the reports I’d love to catchup by reading them. Send to chris (at) chrisumiastowski (dot) com.

Institutional investors pay WAY more attention to rating changes than target changes. In fact, target changes are almost completely pointless. They usually indicate that an analyst is trying to play catchup to what’s happening to the ticker tape. I’ve been there myself loads of times. It’s no fun. It makes you feel like your report is a waste of paper. Take the Canaccord Genuity report that cuts the RIM target price from $28 to $21. The stock is trading in the teens. Imagine how many calls that analyst was getting from clients and the sales desk to change the target or change the rating. How do you have a hold on a stock with a $28 target while it trades at $17 ? So when the target gets cut, all it means is that the analyst isn’t ready to change his view on the stock yet. So the target cut is not news. It’s an absence of news.

Ratings changes are another story. They reflect an analyst who is making a call. At least they usually do! There are exceptions, for example when a company blows up on a quarterly results call and the analyst has a buy rating. The next morning everyone sees a downgrade. That’s not a call. That’s a reaction to the blow up. I’ve been there too. It sucks, but it’s better than having your head in the sand and sticking with a buy when the story has completely changed on you.

So what’s going on with RIM? It’s trading under $18, which still means investors don’t see any kind of future at all. The Street thinks RIM is worth more being sold to someone else (for a one time pop in the stock) or broken up (patents, etc) vs. being run by Jim and Mike. That’s unfortunate.

But is it correct? I’m not convinced. I’d really like to see what people say about their $199 Playbooks. For that price I think they will sell fast. I don’t think RIM will need to write down any inventory, although it’s entirely possible that they could have supplier commitments that result in cash charges if demand doesn’t pick up. GMP pointed that out in their upgrade note today and it makes sense.

I’d also like to see what the Playbook software update really looks like in February. And I’d like to see what the new QNX phones look like.

Developers seem to be reacting well to the native developer tools that RIM has released. And HTML5 is a huge trend in the industry that helps level the “app gap” problem for everyone except Apple (hey – they’re the leader, so they’re really the only ones who get “hurt” by HTML5 if you can call it that).

I’m crazy patient … or just crazy.

Tonight I’m off to have a few pints with a buy side friend of mine who’s been terribly bearish on RIM. Should be fun.

Michael S. November 22, 2011 at 8:37 pm

I think it is funny how arrogant these investors have gotten lately…There was a theory I would like to point out of how Analysts were stating when Apple was ready to release it’s iPhone that it would have no impact on BlackBerry sales, and then 4 Years later we see that otherside of a kind, and now since BlackBerry is working on their BBX phones, the Analysts want to Claim that BlackBerry is dead when in fact BBX will be able to do EVERYTHING the icraphone will be able to do and beyond! In 2015-2016, I want to meet at this same point and will see who is laughing.

squished18 November 23, 2011 at 10:13 am

Hi Chris,

Great insiders view on how the industry works. I learned something today. Why do analysts publicly release their ratings anyways? I’m of the simplistic mind that if an analyst actually had any useful information about a company, they would trade on it instead of releasing it. If nothing else, why don’t they just release it to their own clients instead of making a public statement?

Thanks,

Jeffrey November 23, 2011 at 4:17 pm

I’m hearing the playbook might have native email in February 2012. The tethering play selling two devices obviously didn’t pan out. Not sure how if you have a Linux tablet you can’t at the least take the free, open-source tinymail and make something like Modest for the maemo tablets. Decisions to let this sit make me think management doesn’t get it. I think there is a huge Blackberry bias here. For the majority of consumers without a Blackberry, who decides they want the tablet without email?

I’m honestly shocked.

Noel November 24, 2011 at 10:20 pm

I think you are missing the point Chris. There’s another option that investors might be thinking other than RIM being broken up and sold in parts or being sold to someone else and that’s to be run by someone else other than Jim and MIke. They have proven that they were one trick pony managers (ok maybe two tricks – security and a tactile keyboard) but that show has been long over and they haven’t been able to execute, not to mention not having any vision of where the market was going. The playbook will likely sell out at $199, which is the price it should have been introduced at in the first place. RIM may not write anything off for the Playbook but if they don’t they are likely burying those costs under some other line item since the product, at $199, is being sold for less than the cost of the bill of materials (as teardowns have revealed) and there are certainly marketing, development and other costs associated with the product, let alone supplier commitment charges. Also, I don’t believe any profits made from Playbooks sold at higher prices are going to be enough to offset these expenses. In any event the Playbook has been a zero sum game for RIM and probably has hurt their dwindling reputation more than anything else. But, perhaps, there is a silver lining here as maybe the Playbook failure has dented the arrogance of Jim and Mike enough for them to realize they need to do some serious soul searching and relight the fires they once had burning under their bellies

As for developers reacting well to the tools, that doesn’t mean much to me. The macro picture is that RIM’s market share is drifting down into the 10% market share level and that does not bode well for developer support regardless of how well the tools are. Developers have limited resources and will want to get the best bang for their developer buck.

I am amazed, btw, that you have the discipline to avoid looking at your portfolio snapshot page even as little as once a day when it only takes one click of the mouse (and for me it sits on the right side of the my.yahoo page that opens automatically when I first open my browser). I sure can’t!

I have to admit that I have been tempted to buy RIM at these levels but every time I seriously think about buying the stock my gut feel is that the upside is about the same as the downside and I just don’t like those odds. Maybe if it gets closer to the net tangible book value ($13 +/-) and I see some positive news about market share or product introductions I might (and yeah I know, by that time it will be too late to buy). In any event, I have a limited number of positions I like to hold and so far RIM just hasn’t looked good enough.

Alan Tanner November 25, 2011 at 6:36 am

Noel, it is not clear that the PlayBooks are being sold for less than the bill of materials. iSuppli has indeed estimated a BoM of $271. But UBM TechInsights pegged it at $205 at the PlayBook’s release, and is now estimating the PlayBook BoM at $170. Pricing for some electronic parts does drop fairly rapidly with time (e.g., the processor used in the PlayBook, the OMAP 4430, has probably become a low-cost alternative to TI’s new flagship, the pin-compatible OMAP 4460). Of course, no one knows what kind of volume commitments RIM has made and what kind of pricing deals/penalties RIM was able to negotiate.

The interesting part of UBM TechInsights’ estimates is the variation over the 3 models: $170 for the 16GB PlayBook, $185 for the 32GB model, and $235 for the 64GB model. Even with manufacturing, distribution, hardware guarantee, and royalty costs, RIM should be making a profit on the $64GB model at $400 and possibly on the 32GB model at $300 as well.

I cannot see how RIM could return to higher prices for the PlayBook. But the PlayBooks is a strategic necessity for RIM, for certain enterprise customers who want stay with RIM for security and/or record-keeping reasons. So I believe RIM will bring out new PlayBook models early next year, once the V 2 software is ready … possibly a low cost entry level model, as well as higher cost variants with mobile connectivity and/or a stronger enterprise orientation.

Chris, I wonder what you think about the rumors/reports of a $3 per share write-down this quarter? Press reports refer to Pacific Crest’s James Faucette mention of a risk of this write-down from “accounts receivable.”

There was an interesting observation in the Globe & Mail that RIM changed its accounting policies this year so that it does not recognize revenue until sell-through when it cannot “reasonably and reliably” estimate product returns “based on historical experience.” Presumably this applies to the PlayBook. Even when RIM does recognize revenue from the PlayBook, I noticed in the financial statements that RIM is excluding part of that revenue in order to pay for promised future software upgrades.

So it seems to me that RIM is playing the PlayBook it rather conservatively in its financial reports.

Noel November 25, 2011 at 11:04 am

Maybe the B of M is lower but it’s likely within 10% of the $199 sale price, up or down, and combined with other costs RIM is losing money on every one they sell (but, yeah, as they say “they’ll make it up in volume”! lol).

I disagree that the PlayBook is a strategic necessity for RIM. Their positioning of the Playbook is all over the place and most are confused about it. Is it for enteprise customers? Is it for consumers? To watch flash videos? And, that’s leaving aside the half-baked small form factor and other non-features. As the Playbook becomes more of a joke in the enterprise market, Apple is ratcheting up their coddling of that market with their iPad. I know of a large law firm that committed to buying hundreds of Playbooks that just pulled the order because they realized their IT department was clueless about the usability of the product in the firm. I am sure this is the experience of others. RIM indeed will throw more mud at the wall and see what sticks and will bring out new Playbook models and new software… someday…again late to the party and then promise more catch up somewhere in the future (and miss the dates they promise yet again).

I noticed this morning a report from Indonesia that thousands lined up to buy the new Blackberry models. Then I read that RIM dominates the smartphone market there and they were offering 50% off to the first thousand customers (which explains the line-up!). Contrast this with Apple that has thousands lined up to buy its products when they are released ALL over the world with no 50% off sale.

I know I sound consistently very negative about RIM but I’ve been intimately involved in following the company long enough to realize what is in their DNA and what isn’t. Also I don’t fall in love with stocks as many seem to do on this blog. This company needs a big shake up and as long as the head of the fish is rotten the body will follow. It needs new management (at the top, not the 2nd or 3rd layer). In any event I am sure some of you wonder what I am smokin’ but with some of the positive posts on here about the company I often think the same about others.

Dean November 28, 2011 at 1:26 pm

we get it Noel, you don’t like the Playbook.Is it for enteprise customers? Is it for consumers? It’s for both, I work for a financial services company, and we’ve rolled out the Playbooks to a test group. I’ve had one since launch, I actually prefer the smaller form factor but it is a personal preference.
Nothing wrong with RIM offering incentives to select few in order to cement their brand don’t understand why that would disturb you?

Alan Tanner November 25, 2011 at 1:47 pm

The Indonesia report doesn’t surprise me at all. From my personal experience (somewhat dated, I admit), Indonesians do not idealize “properly” queuing up for anything, far from it. More importantly, RIM is tearing it up in Indonesia. IDC predicts RIM will have a 42% smartphone market share by the end of the year, with nearly 4 million phones shipped annually, in a market which has year-over-year growth of 82%. RIM has a similar story in India: approaching 20% smartphone market share in a market with year-over-year growth of nearly 100%.

People lined up all over the world to buy iPhones? Really? Did you read the Financial Times blog a couple of days ago entitled “India: bet you haven’t got an iPhone”? iPhones reportedly have a 3% share of smartphone sales there. Or Indonesia? 180,000 iPhones sold there so far. I believe those are the #2 and #4 mobile phone national markets. And in how many countries does iTunes actually have tunes for sale?

iPhones are a hit in China. But not in the Middle East, where BlackBerries are the rage (especially in some small oil-rich countries). iPhones are killing BlackBerries in Germany. But Apple is losing market share in the UK, where RIM is the largest smartphone producer.

It doesn’t look like there is a one-size-fits-all strategy for different countries and cultures. BBM is as sticky for RIM in some countries as aps and iTunes is for Apple in others.

I’ll again disagree with you that a tablet is strategic for RIM. RIM has some enterprise markets which it can hold up to the point where someone decides that tablets are absolutely necessary. And once iPads get through the door, then why not iPhones … and RIM would have lost exclusivity. And if RIM does make a tablet, then it had better appeal to consumers as well. That is the lesson that RIM is learning, and that Microsoft learned with its phone effort.

I haven’t followed RIM nearly as long as you have, and indeed, it has become my favorite way to lose money in the stock market this year. But I love comeback stories, and I think RIM has a chance.

While I don’t have access to expensive market reports, I do follow the news, and the numbers do not seem catastrophic to me. According to the latest ComScore report, the number of US BlackBerry users stabilized last month compared to the previous month, after dropping every month since March. The latest iPass report for the “mobile workforce” found that BlackBerry’s share has fallen from 34.5% in 2010 to 32.2% in Oct 2011. That is not good, but not catastrophic either. For the largest European countries (EU5), ComScore reported a steadily growing smartphone market share (8.0% in Jul ’10, 8.7% in Feb ’11, 9.4% in Jul ’11) in a market which grew 30% over that yearlong period.

But what I find most interesting is what RIM is doing outside its traditional markets (corporate and occidental users). The top selling phones in the Phillipines and Thailand. 50% smartphone market share in South Africa. A million new users in less than a month in Nigeria. Hundreds of BlackBerry “experience stores” all over India. I don’t pretend to know how these sales will turn into profits over the next few years, but RIM does have strengths as well as obvious weaknesses.

maxmz02 November 26, 2011 at 8:47 pm

early this year the emaill function was said add in September, now Feb. next year.

playbok start 2 years ago, 9900 start 3.5years ago, RIM like 150 years ago China Qing dynasty, fat but slow and weak, like I said 3 years ago RIM is old before really grow up.

Strange culture in RIM, and this culture generate self-destroy political environment.

In RIM if a new hired person figure out major problem and introduce efficient approach, both manager and his buddy group member will proof their wrong approach works. just like someone point out driving a car is right way, pushing a car is wrong way, then both manager and his buddy group member will hate you, and proof that 3 person can also move the car by pushing it. cheating email will be sent to some vice president, saying like: see, the car moving, pushing a car is a natural part of the process.

It is very strange company culture and strange company political environment, it promote stealing and cheating skill. RIM’s management may be a typical instance in MBA course.

This culture deny or steal hardworking team members’ contribution/innovation, generate strange political environment, destroy RIM.

July 7th 2008 when I start to work in RIM ID group, I found RIM’s CAD skill in ID group is still in low efficient level of 10 years ago, like ID changes can’t be regenerated in mechanical part, so I point out the problem and introduce efficient topdown process, to make sure top level adjustment will always be regenerated in down level.

But the RIM’s CAD experts wrote email to 3 VPs and successfully make them believe that—–whenever top level adjust, continuously and manually audit final parts is a natural part, means low efficient is a natural part in every RIM’s device design program.

They abuse their power layoff the only driver, and use 3 person pushing the car, they will keep “continuously and manually audit final parts”.

“continuously and manually audit final parts” is the mark of not qualified for the position, but in RIM, strange thing happened, they like not qualified person around them, and they are affraid of qualified person in their group, so that no one will point out their wrong approach, so we all know why RIM low efficient, why RIM is in a strange political environment.

and someone hope MS buy it, and then stock may change, who really wanna buy a team like this, and MS is software, RIM is also software( not like moto, if rim live on device, it will have 100 death), if MS stupid enough, the only profit is a long death.

jagmohan swain November 27, 2011 at 10:12 am

I am yet to understand on what basis a cash generating machine such as RIM is being sold at these prices, but I am not surprised.Since long I have understood that price is reflection of two components : A) Fundamentals B) Sentiments.

It’s pretty clear investors that are dumping RIMM at these levels are the ones driven by fear more than an in depth understanding of smartphone market and IM’s business.

I patiently await for value to eventually assert itself, like I did when Netflix went to 300 a share only few months back.No surprises then, no surprises now!!

ljp November 27, 2011 at 2:50 pm

The recent HTC downgrades illustrates your one point, Chris. Technology stocks seem to live in the realm of reactionary coverage. A month ago, HTC was considered the leader for Android devices and now the same pundits are writing articles on how they can’t compete with Apple and Samsung.

Which brings up another idea on the Samsung coverage. They are now being declared the major force in the industry but they stopped reporting any numbers. The financial pages used an analytic firm’s report and ran those ideas as if they were factual numbers for Samsung after their last earnings report. That’s such an odd stance for people to take especially after HTC’s similar unaudited guidance finally bit them.

RIM has their problems in execution but they also seem to continue to be singled out even as their competitors are seeing similar problems. Despite subscriber losses they are still maintaining growth, and any company that is growing while still being able to turn a profit has a future.

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