Research in Motion’s stock price assumes it will take over the handheld world. It won’t

Research in Motion’s handheld two-way pager, the BlackBerry, has developed such a passionate following in some parts of the U.S. that one water-cooler humorist dubbed it the “CrackBerry.” Devotees can be seen obsessively checking their e-mail and tapping away on its tiny keyboard with their thumbs during meetings, in restaurants, in buses or taxicabs, or any time they are sitting down.

The rise of the Waterloo, Ont.-based company’s stock since 1999 produced a core of devotees who believed that RIM, as it’s known in financial and stock circles, was destined for once-in-a-lifetime mass-market success. But RIM’s stock plunged in early 2000 as the air escaped from the dot-com bubble. Despite the dose of reality that hit the rest of the market, RIM’s share price then climbed again. That share price still seems to assume that RIM will fulfill the wildest dreams of its supporters, and then some.

Is that possible? Anything is possible, of course. Is it likely? There are some fairly compelling reasons to believe that it’s not. That’s not to say Research in Motion isn’t a good company, or that the original BlackBerry and its newer cousin, the 957, which looks a bit like a Palm handheld, aren’t useful products. But it’s often said that investors shouldn’t confuse a good company with a good stock, and RIM is a good example.

At RIM’s peak price of $260 on the Toronto Stock Exchange in March, 2000, its market capitalization was $18.6 billion, more than the Canadian Imperial Bank of Commerce or Canadian Pacific, and twice as much as Petro-Canada or Canadian National Railways. That couldn’t last. RIM sank to $35 last May, which reduced the company’s market value to $2.5 billion. But the stock turned upward as RIM signed various distribution deals, including one with America Online, even though those deals had no immediate impact on the bottom line.

After climbing into October, RIM’s share price sagged into the new year. In January, it was near $90. At that level, RIM was trading for 1,125 times its earnings per share for the previous 12 months, and 26 times its sales per share for the same period. By comparison, the much larger handheld- maker Palm, Inc., based in California, was selling for 230 times its trailing earnings and 10 times its sales.

In other words, investors seemed to feel that RIM was somewhere between 2.5 and 5 times more valuable than Palm, the company that virtually invented the handheld device market in 1996 with its PalmPilot. Palm still has a worldwide market share of over 80%, and had revenues of $1.55 billion (U.S.) for calendar 2000. RIM’s revenues during the same period were roughly $157 million, and it was expected to make about 54 cents a share in the 12 months ended February, 2002, meaning this February the stock was trading at 170 times forecast earnings.

One reason RIM’s fans believe the company is worth more than its competitors is the unique nature of the BlackBerry, which can be summed up in three words: instant e-mail access. Like the pager that inspired it, the BlackBerry is always connected to a wireless network, meaning e-mail can be sent and received instantly at all times. Other devices require users to connect to a phone line and dial their provider, or connect to a web site, or call a special phone number.

But that instant access may not be worth as much as RIM fans think it is. Nor is the BlackBerry all that unique. Motorola also has a line of two-way pagers that can retrieve e-mail, and they come in a range of cool colours. Plus, they’re popular with the Los Angeles sports and entertainment crowd. Basketball star Shaquille O’Neal uses one, and rapper Jay-Z wrote a song in which he used the popular phrase “two-way page me.”

Defenders point out that the RIM product has more features than Motorola’s, and that it is designed to integrate with a company’s internal e-mail system, whether that is Microsoft’s Exchange network or IBM’s Lotus Notes/Domino system. That’s one of the main reasons why the BlackBerry is so popular with brokers, traders and sales representatives of any kind. RIM’s strategy is to derive much of its revenue from its proprietary server software and other elements of its system, as opposed to sales of the BlackBerry device itself.

Palm, meanwhile, is focused more on consumers, potentially a far larger market. Palm users can access any e-mail account, not just corporate e-mail. The company also permits designers to create add-on software for its devices. So does a Palm-like competitor called Handspring, formed by the three original developers of the Palm after they left its parent, 3Com Corp. Handspring went public last year, and it markets the Visor, which some industry watchers see as a cheaper and more flexible version of the Palm. Using various plug-in modules, the Visor can become everything from an MP3 player to a GPS receiver to a cellular telephone.

Then there’s Microsoft. As part of its ongoing attempt to diversify away from the slow-growing PC industry, Microsoft has developed a version of its Windows operating system for handheld devices that competes with Palm’s. As well, Compaq Computer Corp. has introduced a handheld Palm-style device called the iPAQ. It doesn’t do instant e-mail–at least not yet. But not everyone wants instant access to their e-mail in the same way stockbrokers and day traders (or basketball stars and rap artists) do. Even if they do, iPAQ, Palm or Visor users can add that capability fairly easily using a snap-on modem to access a digital cellular or data network.

In late January, most analysts still rated RIM a “strong buy.” But when it comes to the consumer market, the BlackBerry faces some stiff competition. Unfortunately for RIM fans who are also shareholders, the stock price seems to assume that the company will not only succeed, but will virtually take control of the entire sector. And that isn’t going to happen.

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