Research In Motion Loses the Love

The company's earnings report has investors concerned about subscriber growth.
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Investors and analysts seem to be falling out of love with

Research In Motion

(RIMM)

.

The BlackBerry maker still has many of the same attributes that sparked investors' interest as recently as last year: It dominates the wireless email market, it's posting strong revenue and earnings growth, and it seems to have a bright future.

But increasingly, the market seems to be focusing on the company's flaws.

That attitude change seemed apparent after RIM's second-quarter report on Wednesday. RIM posted year-over-year revenue and earnings growth of more than 55% in the quarter and offered a better-than-expected outlook for coming quarters.

Investors who once would have been inspired by such numbers to send RIM's stock to new heights instead sent the company's shares reeling on Thursday. In recent trading, the stock was off $7.55, or nearly 10%, to $69.70.

To be sure, the earnings report wasn't perfect. The company argued that it met analysts' earnings estimates for the quarter, but only if excluded an inventory write-off and legal costs related to a long-running patent dispute. And in comparison with the first quarter, RIM's expenses rose markedly in the just-completed period.

But most investors and analysts seemed to focus on subscriber growth. In the quarter, RIM signed up an additional 620,000 users to its BlackBerry email service, bringing its total number of subscribers to 3.65 million. That's a substantial number of new users, and the company appears to be well on the way to meeting its goal of ending the fiscal year with more than 5 million subscribers.

However, that increase was at the low end of the company's forecasted range and well below many analysts' expectations. Moreover, the net addition to the company's subscriber base was actually about 535,000. During the quarter, carrier partners notified RIM that the company needed to purge from its subscriber lists some 85,000 users.

RIM tried to minimize both revelations. The second quarter is typically a slow period, particularly in Europe, company officials argued, insisting that subscriber growth will be higher in coming quarters.

Meanwhile, RIM minimized the subscriber purge as essentially a one-time event. As the company's carrier partners upgrade their customer data systems and integrate them with RIM's, the company should have more up-to-date information about active and inactive customers, it said. In the meantime, carriers continue to pay RIM for inactive users until they ask RIM to purge those users from its system, company officials noted.

Despite these explanations, both revelations seemed to catch the market by surprise. And some analysts argued that they portended bad things to come.

Seasonal factors typically have little effect on fast-growing businesses, some noted. The fact that RIM is starting to see some seasonality could be an indication that its business is starting to mature.

"They have to do something about improving subscribership," said Scott Rothbort, president of LakeView Asset Management and a contributor to

TheStreet.com's

sister site

Street Insight

, who has a short position in RIM shares.

At the same time, some analysts worried that there might be other large blocks of inactive subscribers floating around.

"The thing that surprised me the most was that those carriers were not online" with RIM's system, said one buy-side analyst, whose firm has no position in RIM. "It didn't occur to me" that RIM wasn't getting up-to-date data from the carriers, added the analyst, who asked not to be named.

Others focused on the future. Despite the company's assurances that things will get better on the subscriber front, its forecast for subscriber additions for coming quarters came in below some analysts' projections.

The market expects RIM to hit 10 million subscribers in the foreseeable future, noted Deutsche Bank analyst Brian Modoff in a research note Thursday in which he downgraded the company's stock to sell from hold. But with the company's growth rate apparently slowing, that target may prove difficult to reach, he argued.

"In our view, the company is overvalued. While RIM's target addressable market is large and demand is growing, we believe the financial markets have overvalued the company's growth prospects," Modoff said in his note. Deutsche Bank has not done recent investment-banking business for RIM.

Of course, not everyone is negative on the stock, and some analysts still seem enraptured by it. American Technology Research analyst Rob Sanderson, who has been consistently bullish on RIM, reiterated his buy rating on the company's stock and raised his price target to $110 from $95.

In his own note Thursday, Sanderson dismissed fears about RIM's subscriber growth, taking the company line that the second quarter was just seasonally slow. Fears about competition are similarly unfounded, at least in the near future, he said.

While investors and analysts are focusing on subscriber numbers, they are overlooking other positive points, he said. Many analysts have been fearing that

Microsoft

(MSFT) - Get Report

will soon start to cut into the market for RIM's server software. But that day of reckoning seems increasingly distant, Sanderson said, giving RIM more time to consolidate its lead.

Further boosting the company's prospects, RIM has a huge opportunity in persuading current BlackBerry handheld owners to upgrade their devices, Sanderson noted.

"We now believe our handset forecast may be conservative," said Sanderson, whose firm does not do investment banking.

Still, the hearts of other investors and analysts seemed hardened to such arguments on Thursday. And it was going to take more than an analyst's love poem to win them back.