RIM Takes Lumps on Outlook

The shares slip 5% amid mixed Wall Street reaction.
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Updated from 9:42 a.m. EST

Shares of

Research in Motion

(RIMM)

dropped more than 5% Wednesday, amid mixed reaction from Wall Street analysts on the company's third-quarter results.

On Tuesday afternoon, the wireless device and service provider

topped consensus estimates by posting earnings that more than quintupled its year-ago results.

Citing the company's projected lower tax rate and increased operating income, American Technology Research analyst Rob Sanderson raised his earnings forecast for fiscal 2006 by 25 cents to $3.05 a share and reiterated his buy rating on RIM's shares. The selloff in the stock following its report was wrongheaded, he said in a research report issued Wednesday.

"We see nothing in the November '04 results to challenge our thesis that RIM is still early in a long period of hyper-growth," Sanderson said in his report. "We believe RIM represents one of the very best growth stocks in large-cap tech today."

(American Technology does not do investment banking and Sanderson has no position in RIM shares.)

But not everyone was convinced. Although the company upped earnings guidance above analysts' forecasts for its next two quarters, its revenue outlook for those periods fell short of the Street's predictions.

The company still has a "lofty" valuation, noted Needham analyst Justin Udelhofen, in his own report on Wednesday. Plus, RIM's ongoing patent battle with holding company NTP casts a shadow on its prospects, he said.

"RIM's shares are not cheap. The company remains fully valued, even incorporating our most optimistic projections," Udelhofen said, reiterating his hold rating on the company's shares.

(RIM has not been a recent investment banking client of Needham.)

Investors seemed to be more in tune with the doubters than the cheerleaders on Wednesday. In recent trading, RIM's shares were off $4.21, or 4.8%, to $82.83. Earlier in the day, the company's stock was down as much as $4.62, or 5.3%, to $82.42.

Still, a number of analysts found more to cheer than to jeer in the company's report. RIM's overall sales grew 138% from the third quarter last year to $365.9 million. Meanwhile, the company added some 387,000 subscribers to its BlackBerry service, bringing its total base to more than 2 million subscribers.

The indications are that the company's torrid growth will continue, analysts said.

In each quarter in the coming year, RIM expects its BlackBerry products will become available in 20 to 30 new countries, noted Paradigm Capital analyst Barry Richards in a report on Wednesday. That's double the rate at which the company added countries in 2004, he said, calling the announcement the "biggest highlight" of RIM's conference call Tuesday night.

The company is also rapidly expanding the number of wireless carriers and retail outlets that offer its products and services, Richards noted. Richards maintained his strong buy rating on RIM shares and upped his fiscal 2006 earnings estimate by 31 cents to $3 a share.

"In general, the rapid expansion at RIM continues and we are forced to raise numbers again," he said.

(Richards owns RIM stock. Paradigm has no investment banking business with RIM.)

In contrast, TD Newcrest analyst Andrew Lee decreased his estimates, calling RIM's report "slightly negative." Although RIM's third-quarter earnings were above Lee's expectations, its revenue fell short.

Citing lower revenue expectations and higher operating expenses in coming quarter, he now expects the company to earn $2.97 a share in fiscal 2006, down from his earlier expectation of $3 a share. Lee also brought down his 12-month price target to $120 a share from $131 a share.

But Lee reiterated his buy rating on RIM shares, saying that "our bullishness for BlackBerry remains intact."

"Although we are slightly disappointed with the near-term revenue guidance, our bullish one- to five- to 10-year horizon for the BlackBerry ecosystem remains unabated as the addressable market remains essentially untapped, and RIM's competitive position has never been stronger, in our view," he said.

(RIM has been an investment banking client of TD Newcrest parent TD Securities in the past year.)