Research In Motion
bounced back on Thursday after a sharp drop Wednesday amid concerns about the company's valuation and its new smartphone device.
In recent trading, the company's stock closed up $3.56, or 4.2%, to $88.08. The rebound, amidst a broad upturn in tech stocks Thursday, followed Wednesday's selloff, when the company's shares shed $9.44, or about 10%, of their value.
The market's back-and-forth on the stock mirrors the divided opinion about RIM in the analyst community. In the last two days, at least two analysts have issued downbeat reports on the company, while at least two analysts have given more positive assessments.
Prior to the selloff on Wednesday, UBS downgraded the stock, primarily due to valuation. With RIM's shares trading near $95 earlier in the week, UBS analyst Jeffrey Schlesinger noted that the stock traded at the firm's price target. At that level, the wireless company's shares were trading at about 40 times its expected current year earnings, Schlesinger said, downgrading the company's stock to a "neutral" rating from an earlier "buy."
"We see less upside now following a sharp rise in the price of RIM shares. We see no immediate reason to increase our earnings or target," Schlesinger said. (UBS has done investment banking business for RIM in the last year.)
While Schlesinger is positive on the company's overall prospects, he expressed further concern about its recently introduced line of smartphones. The 7100 devices, currently
T-mobile service in the U.S., are meant to expand RIM's customer base by appealing to both consumer and corporate customers. RIM bulls have pointed to strong initial shipments of the devices as a reason for boosting the stock.
But a survey of industry and carrier contacts indicate that the device may fall short of the heavy expectations, Schlesinger said. Those contacts say that the device's email and instant messaging features may be too complicated for consumers, and that carriers already may be seeing high technical-support costs related to the device. Additionally, the device's innovative design, which attempts to fit a full QWERTY keyboard in the same space as a phone number pad, apparently has frustrated some users, he said.
"We think the consumer product has good potential, but our early research with prospective customers and subsequent follow-ups with carriers and other industry contacts suggest the 7100 is not likely to be a homerun from the start," Schlesinger said in his note.
Schlesinger's worries about the 7100 line were echoed in a report from Mike Abramsky at RBC Capital Markets on Thursday. In a check of T-mobile stores, RBC found strong demand for the smartphone. But much of that demand seems to be coming from current users of RIM's other BlackBerry devices, Abramsky said.
Meanwhile, some T-mobile stores indicated that return rates on the device were running as high as 20% from dissatisfied customers. Among the problems cited were a short battery life and "usability issues," Abramsky said.
"We maintain our view that RIM's valuation will be higher beyond 12 months, however, over the next six months we believe developments like this will continue to pressure valuation. If our channel checks prove out ... investor concerns over these developments may create downward valuation pressure," he said. (RBC has done investment banking business for RIM in the last year.)
But other analysts believe the worries about RIM's valuation and its new 7100 devices are overblown.
The company is seeing strong sell-through of its new 7100 line of smartphones, said Rob Sanderson, who covers the wireless device and software maker for American Technology Research. While its valuation is high, RIM is still trading at a lower multiple than
, even though the wireless company's operating margins are larger and its earnings growth faster than that of the Internet portal, he said.
"It's a high-multiple stock for good reason. They have the growth and the potential to back it up," Sanderson said. (He does not have a position in RIM and American Technology Research does not do investment banking.)
Likewise, in its own channel check, TD Newcrest found little reason to worry about the 7100 device, analyst Andrew Lee said in a report issued on Thursday. The research firm's survey of 52 T-mobile stores found that on average, each store was selling more than one 7100t model per day, while the stores as a whole had seen only a 1% return rate on the devices.
"Although our channel check sample size is admittedly limited, we believe our findings are directionally very encouraging," said Lee in the report. (RIM has been an investment banking client of TD Newcrest parent TD Securities in the last year, but Lee does not have a position in the company.)