RIMM vs AAPL — No Free Pass

On June 25, 2008, Centex posted the following:

RIMM closed on June 25 at 142.336 At that price, RIMM had a:

P/E of 52.5
EPS of $2.26 (trailing 12 months)
with 564 million shares outstanding.

Rimm closed down in AfterHours trading because of “disappointing earnings.”

So how did it disappoint? Here are the year ago quarter comps:

RIMM doubled earnings — $482.5M vs $223.2M — is +116% bad?
RIMM doubled revenue — $2.24B vs $1.08B — is 107% bad?
RIMM projects current quarter revenues of $2.55-$2.65B vice analyst expectations of $2.44B — I ask again, is that bad?
RIMM shipped 5.4M devices during the quarter, and added 2.3M new subscribers a 16.8% quarterly increase, bringing total subscribers to over 16 million. That has to be good!

So what is the problem? Basically, RIMM has a high P/E, a measure of projected growth — as many on this board have wished for AAPL — and its growth to this point in time has matched or exceeded expectations.

However . . .

* Analysts were expecting earnings of $0.85 / share. RIMM only produced $0.84 / share. It missed the high expectations by one (1) penny. * Although RIMM’s revenue guidance was above analysts’ expectations, its earnings guidance was lower.

Why? As TechStock so ably pointed out, it appears that RIMM expects margins to fall. From the conference call they expect increased revenues with essentially flat earnings growth. That seems strange, since they are growing market share and should be enjoying savings of quantity production, at a time when component pricing continues to decline. Surely the rise in energy costs won’t affect margins that much?

I think the answer is the iPhone. Although, when asked if the iPhone market would overlap RIMM’s picture, RIMM CEO Balsillie replied “Nah”, what answer could he actually give? It would be disloyal to his shareholders to say, “We’re scared to death!”, even though he must have concerns. Right now the market for these two companies is huge, with essentially unlimited room for growth for several years. And yes, there will be overlap in some areas. I believe that RIMM will continue to do well, even after the advent of the new iPhone. BUT its rate of growth will tend to slow, as AAPL takes new market share, particularly if the iPhone begins to enjoy greater success in the corporate market.

In order to continue the pace of subscriber growth, I think RIMM will have to make price concessions, which will impact margins. RIMM is going to have to increase incentives and advertising, which will impact margins.

In artillery terms, the first iPhone was a ranging shot. iPhone V2.0/3G will be “fire for effect”. RIMM’s margins are sure to decline somewhat, which will effect earnings. If RIMM is unable to continue any of its metrics — revenue growth; earnings growth; growth in subscriber base — its P/E will drop accordingly.

RIMM’s not the only kid on the block now. The iPhone will surely be competitive in the personal consumer market, and should make steady inroads in the corporate market. Consider this: one year ago, RIMM had no effective competition in either market. The iPhone did not exist, was not even on the market. This month, several analysts have projected that the iPhone will sell as many as 25,000,000 to 45,000,000 units next year. Based on RIMM’s just announced sales of 5.4 million units, the iPhone may outsell the Blackberry next year, even if RIMM continues its rate of sales increase. With that kind of competition, I deem it doubtful that RIMM will be able to continue its rate of increase.

Bottom line: I expect to see RIMM’s P/E drop in accordance with lowered expectations.

Disclosure: I have no position in RIMM. It’s a good company, but unfortunately for its shareholders, the other team just showed up.

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