(Updated on Jan. 14, 2013 at 9:48pm)
Since the article Why It’s Better To Buy RIMM Than AAPL Right Now was published on Nov. 13, RIMM has climbed 69.69% (as of today’s close at US$14.95). In addition, RIMM has just recorded 10%+ gains in back-to-back trading days. However, there is still plenty of upside potential for the stock from now until Jan. 30th (and beyond).
BlackBerry 10 Gets 15,000 Apps in 36 Hours
Today’s 10.25% upward move in the shares was likely due to the news that BlackBerry 10 has received 15,000 more apps, after RIM hosted a 36-hour Port-A-Thon this past weekend. With RIM executives having said that there will be at least 70,000 BB 10 apps at launch (and Thorstein Heins saying that he is aiming for 100,000) the concern of a lack of apps has largely been eliminated. However, investors still have other concerns around RIM, which is why the shares are not higher than they currently are. I address some of these concerns below.
1) Shipments: BB 10 Shipments Will Likely Be Higher Than Expected
The number one concern in the market is how many BlackBerry 10 smartphones RIM will be able to sell. One view that some RIM-watchers have is that most of RIM’s recent sales have been to the mid-range and low-end segments in emerging markets. Thus, it seems questionable that RIM would be able to sell a near-$700 smartphone in high volumes. In addition, enterprise customers are traditionally slow to upgrade. The fact that BB 10 requires BES 10 means that enterprise customers might have to wait until May (when BES 10 is available) to purchase BB 10 smartphones.
While those concerns are logical, I find them to the overblown. Since RIM has significant carrier support, it should have no problem selling high volumes of BB 10 smartphones into the channel right away at launch. The fact that channel inventory would originally be zero means that RIM could record significantly revenues from shipping millions of units to carriers worldwide in the quarter ending March 2. Meanwhile, most shipments to enterprise users would have to wait until the quarter ending early May (or the one ending early August). Regardless, with the carrier support that RIM has, revenues should be much higher than consensus expectations, which leads to higher earnings (in the next point below).
2) Profitability: Wave of Analyst Upgrades Could Be Coming Due To Positive Earnings
The current consensus earnings estimate for RIM for FY2014 is -$0.54/share (according to TD Waterhouse). However, this is largely due to the many analysts who are behind the curve in covering RIM.
In my base-case, which involves BB 10 shipments of 30 million units at an ASP of $450, RIM would have EPS of $2.37. In the bull-case of 40 million BB 10 units (also at ASP of $450) RIM would have EPS of $3.94. With a 12X forward P/E, RIM would trade at $23.70 in the base case, and $39.40 in the bull case. This represents an upside of 58.53% and 163.55%, respectively.
Many analysts who currently are projecting a loss for FY 2014 would likely have to raise their forecasts to a profit in the near future, which would be a boost for RIMM.
3) Service Revenues: Service Fees Likely To Fall Much Slower Than Expected
The market’s second biggest concern around RIM is likely the service revenues. After the latest earnings, the shares jumped 10% in after-market trading, only to fall 20% (from the closing price) when trading resumed the next day, due to concerns about service revenues.
From talking to Sell-Side analysts, it appears that while RIM will offer email for free on BB 10 (like on the PlayBook) it will continue to receive service revenues for BBM. This is because RIM has added additional services, including BBM Voice and BBM Video with document and screen sharing. In addition, BBM Money is launching in the future.
While service revenues could decline by 20%-25% in a worst-case scenario in FY 2014, concerns of a steeper drop are likely unfounded. In addition, RIM will address investor concern about this issue in the near future (before or after Jan. 30th). An announcement that RIM will continue to receive service revenues for BBM would be a significant boost to the shares.
4) January 30th: Launch Event Will Likely Dazzle The Crowd
The launch event on Jan. 30th is another investor concern. The market is uncertain about how ready BB 10 will look and what sort of features it will have. In addition, the availability date is a question mark.
Thanks to QNX and TAT, I expect that RIM will be able to dazzle the audience with several visually-stunning features. The more pleasant surprises RIM can reveal, the higher the share price will go. I expect the presentation to include the QNX Bentley with QNX Car 2.0, in order to show how the Z10’s NFC capabilities can benefit users in other areas of their lives.
As for availability, I expect availability at the fastest carriers to be between Feb. 4th to Feb. 15. If this turns out to be the case, the shares should receive a boost, since it is much early than the late-March that RIMM bears expect.
In recent months, I have had the belief that RIMM can reach its Book Value of $19.59 (according to TD Waterhouse) in the run-up to January 30th. This represents an upside of 31.04% over today’s closing price. After the launch, my base case of $23.70 represents an upside of 58.53%, while the bull case of $39.40 represents an upside of 163.55%. Of course, investors should monitor developer support, carrier support and consumer uptake very closely before and after Jan. 30th.
Disclosure: I am long RIMM.
Where do you think RIMM will trade at by Jan. 30th? What about after Jan. 30th? Leave your comment below.