The Many Earnings Per Share of RIM
Mohammed is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The once mighty Research in Motion (NASDAQ: BBRY) is set to release the eagerly awaited Black Berry 10 early next year. The Blackberry was once the coolest device on the block and jolted up RIM's shares in the early 2000s thousands of percentage points, but now has lost its relevance especially in the developed world. RIM's shareholders, CEO Thorsten Heins, and Blackberry fans are banking on the BB10 to return RIM to its former glory.
State of the Smartphone Market
The Forecast for global smartphone sales for 2012 are around 665 million units an increase of 37% over last year and expected to grow next year to 865 million units, an increase of almost 30%, according to research from Digitimes. Android and ios dominated the market this year with 68% and 18.8% of market share for the first 3 quarters of 2012 respectively. Around half of Android's market share can be attributed to Samsung. Analysts are currently forecasting Android and iOS to maintain the same market share more or less in smartphones for next year and for Android to steal market share from the iPad in tablets. Blackberry devices currently represent only 4.7% of smartphone sales down from a high of 19.9% in 2009. RIM's market share next year depends on how well its new BB10 devices will perform.
So will the Blackberry 10 Succeed?
Currently, it's any one's guess. Reviews of the early BB10 dev alpha have been positive so far, but whether consumers will leave their Apple (NASDAQ: AAPL) iPhone or Google's (NASDAQ: GOOG) Android powered device for the BB10 is not clear.
While we can't say for certain whether the BB10 will succeed or not, we can try to estimate the effects of certain scenarios on RIM's top and bottom line as well as the share price.
Quantifying the Scenarios
Tavis McCourt with Raymond James recently performed a sensitivity analysis which demonstrated that RIM needs to ship 18 million BB10 units to break even in FY2014.
He assumed that the average selling price of a BB10 device will be $375, that service revenue will be $3.9 billion, and that operating costs will be $4.05 billion. He also assumed that 24 million units of BB7 will be sold in FY 2014 with a negative gross margin.
I noticed from his sensitivity analysis that for each additional million units of BB10 shipped, RIM's earnings per share increases by 0.14 cents or about $72 million. I used the results of his sensitivity analysis to predict what would happen in the following scenarios:
*FY2014 for RiM is from 1st April 2013 to 31st March 2014
**Market share Calculated using the Calender 2013 Forecast of 865 million units & does not include older BB models
Apple and Samsung?
I included a Scenario for a Samsung and Apple like performance, not because I or any other analyst forecast that BB10 sales will be that strong in their first year, but because I think it would be interesting to see what the numbers would be if BB10 sold as much as Apple or Samsung, who both sold around 90 million units in 2011, the latest full year that we have actual results for. (Apple 93 million and Samsung 97 million).
Apple is forecasted to sell around 130 million iPhones in 2012 and the estimates for 2013 are as high as 200 million iPhones. Samsung is expected to sell around 200 million smartphones in 2012 and the estimates for 2013 are as high as 300 million.
I don't expect BB10 to sell 90 million units in the first year, not just because demand will not be that strong, but because probably there won't be that many BB10s to sell. Unless demand is very strong in the first quarter and there is a severe shortage, I believe that RIM's management will not want to risk another inventory write-down like what happened with Playbook and will be more conservative regarding the supply side of the equation. However, if the BB10 does well in its first year we might see this number or higher in its second year of release with the global smartphone market approaching 1 Billion units.
What about Nokia?
I didn't include a prediction for a Nokia (NYSE: NOK) like performance in the table because we still don't have a full year of results for numbers of Lumia units shipped. Nokia until the end of the last quarter had shipped 10.2 million Lumia units from the release of the first version in November 2011. However, it should be noted that Lumia smartphones to feature Windows 8 were only recently launched in 2012 Novemner 2012 so we still do not have a full quarter of results for Nokia with Windows 8 OS devices.
If we assume that Nokia ships 8 million units this quarter which is the highest quarter in terms of sales for smartphones and can represent somewhere around 40% we get 18.2 million. If we also assume that RIM's numbers will benifit next year from the 30% growth in total smartphone sales, then RIM might be able to sell somewhere from 18 to around 24 million units for a Lumia to BB10 like performance for an EPS in-between $0.11 and $0.95 respectively, according to the above estimates.
The Price is Right?
Well, first let me start of by saying that the above prices are not price targets, I can't tell you what price RIM will be trading at in the future. Rather what is presented in the table is a visualization of what the stock price would be if it was trading at certain valuation metrics.
For the two bearish scenarios, the price reflects the shares trading at the same anemic p/s multiple of 0.38 that it's currently trading at. I think that if the company makes a huge net loss then this multiple will most likely contract further due to fears of future bankruptcy and liquidation and the shares will most likely drop below $5. On the other hand if the RIM breaks even then I believe this multiple will expand due to hopes for a brighter future.
As for the two bullish scenarios, the price reflects the shares trading at the current S&P average P/E ratio of 14.42. I don't know what to tell you here, the actual multiple could be all over the place. On the one hand RIM once traded at a historical high of a P/E ratio of 70 way back in the days of 2008, on the other hand other Tech Titans and strong performers such as Apple and Google have been trading at below average P/E ratios lately.
(I believe the reason is that they grew so fast for mega-cap companies that the multiple couldn't adjust fast enough).
I am pretty sure about one thing, though; RIM's share price will be significantly higher than today should any of the two bullish scenarios take place and the revenue and earnings estimates above are correct.
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