Buy this Phone Company Before Earnings?
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
During Research In Motion's (NASDAQ: BBRY) last three quarterly earnings, RIMM failed to meet expectations twice, which further solidified the expectation that RIMM is a 3 legged donkey in a NASCAR race. RIMM has fallen from grace, going from a $86 billion gorilla to now being a $3.8 billion ant in a market dominated by the likes of Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). Both those giants control a combined total of 85% of the smartphone market according to IDC, which states "Android (Google Inc.) — 104.8 million units, 68.1 percent share (46.9 percent a year earlier)" and "iOS (Apple Inc.’s iPhone) — 26.0 million units, 16.9 percent share (18.8 percent a year earlier)". Apple's drop most likely comes from the delay of the rollout of the iPhone 5, which was released last Friday.
Also according to IDC, Blackberry's performance year over year was pathetic, with "BlackBerry (Research in Motion Ltd.) — 7.4 million units, 4.8 percent share (11.5 percent a year earlier)". A 58.2% drop in market share is never the kind of thing you want to see. Plus, Blackberry delayed when it was going to release its new line of phones and new OS Blackberry 10, but should go on sale early next year. That is one future catalyst which has the potential to be huge, but you also have to consider that more and more phones are being churned out by the competitors, which will now include Microsoft (NASDAQ: MSFT) and Nokia Corp.
Deal with Mr. Softy
RIMM and Microsoft reached a deal where RIMM can use Microsoft's file memory technology in its smartphones, which is known as exFAT. This means RIMM phones can transfer large amounts of multimedia data from its phones to a computer. RIMM is trying aggressively to salvage what market share it can by providing as many features as it can on its phones. It's phones are also supposed to be able to run multiple applications at the same time.
What this means for competitors
In the smartphone space, everyone is trying to one-up each other, with Google's new Motorola release coming out with a "wall to wall" touch screen to try and woo consumers to a large screen with more room to watch Netflix and YouTube. Then Apple releases its new iPhone 5 with a longer screen and thinner device to try to show off its sleek design. But the new thing this fall also seems to be integration, where you can get work done on an iPad and easily transfer that to a Mac or if you have a Windows 8 Tablet you can do something similar with a PC. Google, on the other hand, doesn't have that kind of integration. You can do work on an Android tablet and move it to Google Docs, but that just isn't quite the same as what Apple and Microsoft can do.
So with RIMM's new deal with Microsoft, it could be trying to replicate what Apple and Microsoft can do already so that isn't really an issue for them, but for Google it could become a problem. This is particularly evident in the enterprise space, consumers who want to be able to use their electronic devices for work want something to be seamless and easy. They don't want to have to clunk around Google Doc's trying to upload a large file of hard work they just did. I think this could be RIMM's push back into the enterprise space, and could be interesting to see if they keep playing this angle going forward. The enterprise space is what kept RIMM going even after most consumers left them for dead because of their email security IP and software, which is where most investors think RIMM as its value.
Does RIMM stand a chance with the competition?
The smartphone industry is booming right now, with projections from the IDC saying that the industry will grow by 33.8% by the end of 2012. But, IDC also predicts that RIMM's market share will be 5.9% in 2016. Now, that projection was made back in June when RIMM had 6% of the market, so maybe RIMM won't come in as expected. Now projections are just guesses made by people with opinions, but it does seem like RIMM is going to come in too little too late. Even Microsoft is having trouble getting market share, and if it does manage to make some headway into the market, it will just take away from consumers willing to go with a "3rd party platform" (one that isn't Android or iOS) like Microsoft's upcoming Windows 8 mobile platform. The Microsoft-Nokia team is the big wild card out there, so the success of this venture is important to watch, because it will allow both investors and consumers to see if the market is willing to have more competition other than the big two. Plus Microsoft has tens of billions of dollars on its balance sheet, and with someone as headstrong as Steve Ballmer at the helm, I expect Microsoft is willing to burn through billions more to shove (buy) its way into the market.
I'm much more bullish on Microsoft and Nokia being successful than Research in Motion. RIMM's phones just simply aren't any good, they are trash. When I see one of my friends on one, they never have a data plan for it and they regret buying the phone. Even in the corporate sector, companies are leaving Blackberry for other operating systems. So unless Blackberry 10 is a huge game changer, RIMM's done for in the manufacturing market. Also, Samsung is slated to release the new Samsung Galaxy S4, which runs on Google's Android OS, with the previous models being very popular. The S3 has sold over 20 million phones so far. RIMM is going to be fighting a vicious battle on several fronts.
Smartphone Growth and the Power of Cash
The IDC expects the smartphone market to hit 1 billion phones sold per year by 2015, up sharply from the 682 million expected to be sold in 2012. Microsoft is making a very aggressive push into this sector because of that growth, but even Mr. Softy has to deal with the headwinds of Apple and Google. Microsoft can run at a loss in numerous divisions and have its cash cows keep it insanely profitable. Google doesn't even charge manufactures to use its Android system; it makes money off of mobile advertising. Apple is the only company that needs to keep its prices high, because that is where it makes all its money, in the sale of the phone. RIMM, on the other hand, has to sell its phones for a profit, or it goes bankrupt. RIMM doesn't have the brand power of Apple, which allows Apple to demand a premium price for it premium products.
RIMM also doesn't have the cash hoards of these three giants, with Microsoft ($63 billion), Google ($43 billion), and Apple ($117 billion), coming in much lower at $1.9 billion. Having a cash hoard allows a company to make strategic acquisitions or to "buy your way in" like Microsoft is doing with app developers. Cash is king, and RIMM just doesn't have that much. Eventually feature phones, which have seen sales plummet over the past several years, will become obsolete in most countries, and smartphones will become the new normal. 1.8 billion phones are sold each year, and I expect by 2020, 90% of those phone sales will be smartphones.
It is hard to see how companies like Nokia and RIMM could be doing so badly, as their industry is growing like wildfire right now. It goes to show that picking the right companies really does matter, and just because that company is in a hot sector right now (like the "social media sector"), you still have to put the work in to research what you are investing in.
I don't see much materializing from RIMM's Blackberry 10 launch, but to be fair it is still too early to see how successful it will be. But, increasing amounts of competition coming from Microsoft-Nokia and Samsung will definitely make this a steep uphill climb for Research in Motion. RIMM seems to have become just a "value play" to some and a great short for others. I wouldn't buy RIMM ahead of earnings, and would be cautious about holding RIMM. Those who are already invested in RIMM for the long term don't really need to care about this upcoming earnings release, but those who just bought in should watch out for a sharp drop after earnings.
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