As analysts and investors jump ship, Macquarie sees opportunity in RIM

Following first-quarter earnings that sent investors and the media into a tizzy, analyst coverage of RIM has been fairly monotone. The consensus? The company is doomed. Sure, there’s been an odd half-hearted vote of confidence here and there, but the majority of analyst coverage we’ve seen has been negative and investors are exiting en masse. In a 45-page report published last Tuesday, however, analysts at Macquarie Capital Markets paint a different picture of RIM’s business. Despite product delays and declining market share, the firm issued an Outperform rating and set a 12-month target on shares of RIM stock at $40. Read on to find out why.

Macquarie writes that while RIM took a beating in the key North American market last quarter, the company’s international performance in the fiscal first quarter grew 86% from the same quarter a year earlier. The firm sees continued success for RIM in several markets, citing a variety of advantages including lower handset costs and subsidies for BlackBerry devices versus the competition, a reluctance to push the iPhone in numerous markets for fear of cannibalizing texting revenue, and even spectrum and network capacity restraints at international carriers that spur the need for devices with minimal data consumption — an area where BlackBerry phones shine.

“Buyside and sellside capitulation creates an opportunity for long-term value investors to own a high quality tech name at a compelling valuation,” Macquarie’s report reads. It continues, “We believe comparisons to Nokia or Nortel are unfounded. Device revenue outside of North America should grow 81% y/y in Q2, led by Indonesia, Thailand and Latin America. We expect, even with international device revenue slowing to just 3.6% in F13, which could prove overly bearish, services growth will continue. The company should exit the year with $3.4bln of cash (after buyback) and no debt, despite the shortfall in earnings.”

Macquarie sees RIM’s enterprise business and the company’s growth in international markets as having the potential to carry the company forward for longer than other firms expect. “RIM’s numerous challenges have been well documented in recent downgrades, earnings reports and press articles: delayed product launches, insufficient and misallocated R&D, poor management reaction to changing industry trends, subpar communication with investors, strengthening competition, falling ASPs, and ineffective CEO and Board structure ring the loudest,” Macquarie’s report notes. “We view these risks, both self-inflicted and structural, as formidable but not yet insurmountable. We believe that RIM’s international business and its software and services segments have a longer tail than many shareholders expect and that current share prices already imply negative value for the US device and tablet businesses.”

With 12.9% of the global smartphone market last quarter according to Gartner, RIM is still the No. 3 smartphone vendor in the world behind Nokia (25.5%) and Apple (16.8%). RIM is also the No. 3 smartphone vendor in North America behind Apple (27.1%) and HTC (18.6%), though the firm’s share has plummeted from 41.3% in the first quarter of 2010 to 16.5% last quarter.

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