On the RIM

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A lukewarm reaction to RIM’s PlayBook has many analysts wary about RIM’s competitiveness.

When you make a product so useful and spellbinding it is nicknamed after crack cocaine, you know you're on to something.

That was certainly once the case with the BlackBerry, or the CrackBerry, as it was called by many. That somewhat odd euphemism symbolized how dominant Canada's most successful tech firm, Research in Motion (RIM), had become.

Only a few years ago, the BlackBerry was a corporate must-have. Even the most popular and powerful man on Earth -- Barack Obama -- loved to "crack."

Things were looking bright for its maker, Research in Motion, based in Waterloo, Ont. After all, it had effectively changed the way we work and communicate.

But today, RIM's future is suddenly in doubt. BlackBerry has gone from the IT world's "it" device to a perceived one-trick pony, fighting off tech-sector giants Google and Apple.

It's no longer in a battle to remain the leader. Now the question is whether RIM can hold on to what market share it has left.

Still, it's hard to deny millions of BlackBerry users find their devices indispensable. Furthermore, RIM has impeccable financials. It earns billions of dollars in profits annually, carries no debt and, perhaps for the first time in a long time, seems to be a reasonably priced stock buy for value investors.

RIM's share price has fallen so far -- to about $27 a share today from $148 a share in 2008 -- it's no longer in the purview of just mutual funds and other institutional investors.

This is not an uncommon story in the tech sector: A once-industry leader loses its dominance and finds its place among the rest of the tech sector, reasonably priced, hanging around and hoping to mount a comeback.

Microsoft, Dell, Cisco and Intel have all tumbled from nosebleed stock prices to more reasonable valuations, says Tony Demarin, president of BCV Financial in Winnipeg.

"These are companies that are now kind of stodgy, slow-growing and struggling to reinvent themselves," says Demarin, also an analyst whose company specializes in value investing in firms that provide dividends.

As a value investor, Demarin wouldn't touch RIM stock when it was flying high. Even today, at its seemingly undervalued price, he remains skeptical because of RIM's growth prospects.

Here's the rub:

"Once the stock price comes down into the value category, many times they become 'value traps,' where it appears they are great investments," he says.

"But the problem is the fundamentals remain flat to negative and, over time, there is deterioration in the fundamentals of the business."

Nokia, the Finnish mobile phone maker, is maybe the most apt comparison to RIM, he says. It was a leader in the cellphone market. That is, until the smartphone came along, with BlackBerry leading the charge.

Yet Nokia is still around today and profitable. Its profits fell from $7 billion annually to $891 million in 2009, but they doubled the following year to $1.85 billion.

"It doesn't mean you can't make money with these stocks, but it is not as clear and there's a risk to investing, and Research in Motion falls into that category," Demarin says.

It's too early to eulogize RIM, speculating it will be taken over by Microsoft or have its bones picked clean for its technologies -- a fate similar to that of Canadian tech giant Nortel.

It still has a security advantage over other smartphones, remains the dominant player in the institutional and business world, grew its revenues overseas by 67 per cent from last year and has grown its profits to more than $3.4 billion last year from $1.2 billion in 2008.

But if you live by rapid growth -- as all tech-sector firms do -- even the expectation of a slowing in that pace can lead to a grave scenario.

"It's a great company, but it doesn't live up to the expectation of growth by the market, and the market is a bit of a hard taskmaster," says Knud Jensen, a professor of strategy and entrepreneurship at Ted Rogers School of Management at Ryerson University.

RIM's main problem has been matching the growth of its competitors in the consumer market, where concerns about secure communication do not weigh as heavily as ease of web browsing.

It's the consumer market where RIM has been losing battles with Apple's iPhone and Google's Android.

Jensen says while RIM has made some missteps and much has been made about the awkward corporate leadership structure of its co-CEOs, founder Mike Lazaridis and Jim Balsillie, it's perhaps in marketing that it has "dropped the phone in the crapper."

But Jensen says that's hardly surprising.

"If you think about the institutional and business markets, they don't require a lot of marketing," he says.

We consumers of technology for pleasure purposes are a different breed. The slick Apple marketing campaigns, along with the eye-pleasing design of the iPhone, have many techies willing to wait outside a store overnight for the latest release of an Apple gadget.

Apple co-founder and CEO Steve Jobs understands hype, whereas marketing is not really part of the RIM leadership's circle of expertise, says Jensen. Still, RIM has a new operating system, one based on the recent acquisition of software firm QNX. It's already used on the PlayBook tablet -- and some experts speculate the QNX could again put BlackBerry ahead of the pack.

But recent delays for the new BlackBerry Bold 9900 and lukewarm reaction to the PlayBook have many analysts wary about RIM's competitiveness with Apple, which is expected to provide its own highly secure mobile system soon.

Apple, however, may be the least of RIM's worries. Google's Android operating system has become the platform of choice for many smartphones sold to the consumer market. And its market share in the United States has increased to 36 per cent in April from 26 per cent last November, while BlackBerry's share shrank by about the same amount.

The worry is Google has done little marketing. It has quietly grown market share, providing an easy-to-use system to any smartphone maker willing to use its technology.

RIM's future certainly isn't over yet. It still has a robust research and development (R&D) budget. But with its stock price halved, it will be hard-pressed to keep up R&D to match its competitors, which have budgets 10 times the size of RIM's.

If RIM is to carry on successfully, maybe not as a leader but as a vigorous competitor in the sector, the next six to 12 months will be crucial, Demarin says.

"Watch the sale of PlayBooks and the sale of the BlackBerry 9900." If sales exceed expectations, buying RIM stock today will turn out to be a bold but brilliant move.

"If those things fail to excite investors and analysts, and followers, then I'm very concerned about this company because they have nothing to hang their hat onto."

And then, the thrill of the buy today could morph into buyer's remorse tomorrow.

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition July 2, 2011 0