RIM Shares Run to the Limit

A 75% run-up in three months may mean a top is within sight.
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Shares of Blackberry maker Research In Motion (RIMM) have had a fantastic run. The stock has zoomed 91% over the last year, and in the last three months alone, it has shot up some 75%.

But how likely is it that such a torrid pace can continue?

RIM's run is the envy of rivals and a source of joy to investors who hopped aboard last quarter, but some observers now see an overvalued name that can't have much run-up left. They say there might be better value going forward in handheld rivals

Palm

(PALM)

or

Motorola

(MOT)

.

RIM's recent performance may be mostly momentum-driven, says Roger Nusbaum, portfolio manager for financial planning firm Your Source Financial and a contributor to

RealMoney.com.

"RIM's rally now is more about the state of the market than what's going on fundamentally with RIM," he says. "I do not think RIM will turn down before the market, so it has at least six to eight weeks of further momentum, but whether there are any fundamentals behind it is arguable."

Shares of RIM closed at $129.14 on Tuesday.

The type of continued success in such a stock climb can be deceptive, says Phillip Butts, president of Moreten Bay Capital. "You have over 30 analysts now who cover the stock, and when you have that kind of coverage, you get a bit euphoric."

RIM's market cap has risen to $23.6 billion, which appears outsized for a company with annual revenue of $2.39 billion and cash flow of $190 million. "It's a dot-com kind of valuation here," says Butts. "Market capitalization that is 10 times sales at this maturity in the stock's cycle is very scary."

But there's an important difference between RIM and dot-com bubble stocks: RIM has demonstrated strong earnings. For its latest second quarter, RIM's profit rose 27% to $140.8 million, or 74 cents a share, from $111.1 million, or 56 cents, in the year-earlier quarter, and sales rose 34% to $658.5 million, more than the $644 million expected by analysts. Shares of RIM surged 19% the day after that report alone.

"After its earnings, many people I know who were negative turned positive on the stock," says Matt Kelmon, portfolio manager for Kelmoore Investments, which has no position in RIM, Palm or Motorola.

But there's less clarity on whether RIM can sustain that kind of earnings growth. "They generate so much in earnings off a small amount of revenues that the market is only thinking about it and giving it a high P/E," says Butts. "The problem is you have to keep growing, so can they do that?"

Growth hurdles are where RIM could break its stride. A shift in consumer spending could lead to a lull in the smartphone market, while increasing convergence in the handheld market could lead to users shifting loyalties.

For investors who missed out on RIM's rise, it may be too late. RIM is likely to go up another 10 to 20 points (representing, at most, an upside of 15% if timed right), says Butts, but by January it's likely to fall back to a level of around $100 -- assuming it doesn't post blockbuster earnings next month.

Short-term investors could still ride the RIM wave, says Nusbaum, but they have to be cautious. "The trend line for RIM

's chart is clearly up and moving at a 45-degree angle," he says. "But if you enter then, you've got to be religious with the stop and have that at about 5%." When the momentum turns, he warns, it will be quick. He doesn't own shares in RIM, Palm or Motorola.

For that reason, Palm could be a better bet in the space at this point. "Palm is a lot less expensive on almost every metric you can name," says Kelmon. Shares of Palm, though, have been up just about 9% in the last three months, although it's up 20% this year.

Palm has a market cap of $1.57 billion, with annual revenue of $1.59 billion and cash flow of $109.5 million. "It's just one-14th the size of RIM, but they do only 40% less sales than RIM," says Butts, who sold his Palm shares six months earlier. He does not own any RIM or Motorola shares.

What Palm doesn't have going for it is the comfort of regular monthly revenue that RIM garners from its subscribers. (Palm's revenue is generated from hardware sales.) In addition, "Palm also doesn't have the kind of excitement that RIM can generate," says Nusbaum.

The dark horse in the smartphones market could be Motorola. The company acquired wireless-messaging player

Good Technology

in a move that puts it squarely in competition with Palm and RIM.

Motorola shares climbed last month to $26.20, but have pulled back 17% to close at $21.68 on Tuesday. Shares of Motorola have been down 5.1% in the past 12 months. At its current level it is an attractive buy, says Kelmon. "Motorola trades at 1.2 times sales now and has the most upside," he says.

For those willing to place bolder bets, he has a suggestion: Long Palm and Motorola, short RIM.