Research In Motion (RIMM) got crowned with a downgrade Wednesday as the BlackBerry smartphone enters the consumer market.
JPMorgan analyst Ehud Gelblum welcomed RIM to the big league with a hard look at the challenges it faces outside the corporate email niche.
As it pushes into the broader market, RIM must deal with a new set of competitive pressures, or, as Gelblum writes, "levels more representative of a worldclass handset vendor."
Three takeaways from the report:
RIM's research spending has to increase to keep up with the likes of Nokia and the rest of the industry.
Phone replacement rates are slowing worldwide as the recession deepens.
Formerly rapid subscriber growth has slowed dramatically with fewer people to sell phones to.
RIM spends about 6% to 7% of its revenue on research and development. Gelblum says that is one cost item that will have to increase at the expense of profits. He puts industry R&D spending at about 11% of sales and expects RIM's spending to reach 9% in the next two years. Gelblum downgraded the stock to underweight from overweight.
People aren't buying phones as quickly as before. This downward trend is likely to cut into sales at all phone companies, including
For a little insight into RIM's replacement rates, Gelblum cites the policies at his own firm, where BlackBerry users aren't allowed to upgrade to newer models as frequently as they had in the past.
Unless employees are willing to commit "BlackBerrycide" ( presumably the act of losing or ruining their current model), the old year-and-a-half replacement rates have become more like two years or more, Gelblum said on a conference call Wednesday.
And worldwide, Gelblum estimates that money worries have caused consumers to delay their phone upgrades up to five years from the usual two- to-three year replacement rate the industry once enjoyed.
Another macro trend working against RIM is that wireless growth rates have peaked. "While subscribers should continue to grow, we believe the rate of growth of subscribers should slow considerably over the next 18 months," Gelblum wrote in his note.
In an aside, Gelblum said his predictions are colored by an outlook that calls for higher unemployment levels and no real economic recovery for more than a year. Market optimists, however, have already pushed stocks up from multi-year lows under the belief that a rebound is around the corner.
RIM shares were down $1.27, or 3%, to $42.96 in mid-day trading Wednesday.