RIM Gets Yellow Signal

Looming competition will slow the BlackBerry maker's magic ride.
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BlackBerry maker

Research In Motion

(RIMM)

may be on a roll right now, but rivalries and a too-high stock valuation make it improbable that the company will be able to sustain all the enthusiasm.

RIM is likely to post strong earnings for its third quarter on Thursday and offer robust guidance for the next. Though its fundamentals remain strong, the smartphone player faces a number of challenges -- most prominent being the increasing competition from phone vendors such as

Nokia

(NOK) - Get Report

,

Motorola

(MOT)

and

Samsung

.

Apple

(AAPL) - Get Report

, too, has just thrown its hat into the ring.

RIM's third-quarter fiscal 2007 results are unlikely to reflect any of this. For the third quarter ended Dec. 2, analysts polled by First Call expect RIM to post revenue of $815.9 million, or 94 cents a share, compared with $560.6 million, or 71 cents a share, for the same period last year.

RIM forecast revenue in the range of $780 million to $820 million and adjusted EPS in the range of 88 cents to 95 cents.

Meanwhile, RIM's stock reflects the optimism around the company. Shares of RIM are up more than

105% in a year and 55% in three months. However, concerns about valuation are growing.

Some fund managers say they have exited the stock in the last few weeks because they fear the shares are primed for a pullback. "RIM shares seemed to have reached their peak valuation," says Satyen Chatterjee, president of Strategic Capital Management. "But if you consider the newer smartphone support services coming from

Microsoft

(MSFT) - Get Report

or Apple entering the market, there is concern that RIM may slow down."

Shares of RIM closed the regular session up $1.90, or 2.51%, to $134.75.

RIM saw some sustained buying last week, and many analysts continue to be bullish on the stock. Among the biggest growth driver for shares going into 2007, analysts say, will be the company's outlook for the fourth quarter.

"There are a number of investors who think the valuation may be on the high side, but other investors who are carrying the day are hoping for upside surprises in earnings," says Lawrence Harris, an analyst with Oppenheimer, which makes a market in RIM shares.

RIM's fourth-quarter results would to a large extent depend on how successful the company is with the launch of the BlackBerry 8800 series models dubbed Indigo and Crimson. The 8800 series is an upgrade over Pearl that combines the multimedia features offered by Pearl with a full qwerty keypad.

The timing of the release of the new models -- expected by some analysts to take place in January -- could be important in determining RIM's earnings for the next two quarters, says Harris.

"Investors are focusing not only on the November quarter, but also February and the timing of the release of the Indigo model," he says. "That's what is driving the stock right now."

RIM

reached its 52-week high of $142.66 on Nov. 24. The stock declined 12.5% and touched a low of $124.64 on Dec. 12. Now the wireless carrier is inching its way up again.

Some of it could just be a "dead-cat bounce," a stock market term for a temporary recovery after a prolonged decline. "It is not clear to me this is a bullish trend," says Richard Williams, senior software analyst with ICAP, which does not own shares or have a banking relationship with RIM.

"We think the stock has gone beyond expectations and the current run is untenable," says Williams, who estimates that the stock has gone 20% to 30% beyond expectations and would advise clients to sell.

The Options Issue

RIM is investigating its

historical stock option grant practices and has said it will not be in a position to

file its second-quarter numbers on time. RIM has said that by the fiscal year ending March 3, 2007, it will file its financial statements for the second and third quarters and any historical restatements.

The company said it doesn't expect the restatements to have a material impact on second- or third-quarter numbers.

In addition to RIM's strong fundamentals, the Waterloo, Ontario-based company is making some smart moves -- stepping out of its comfort zone (enterprise messaging) to target consumers with its latest phone, the BlackBerry Pearl.

The Pearl debuted to rave reviews, though it is in a tough fight with rival Samsung's BlackJack phone for the top spot at wireless carriers.

Meanwhile, competition for RIM in the smartphone category is heating up. Cingular, for instance, currently offers 11 smartphone models.

That's where RIM's upcoming model Indigo could change the game, writes Rob Sanderson, an analyst with American Technology Research, which does not own shares of RIM or have an investment banking relationship with the company.

"While bulls could see handset industry leadership with the 8700 series, we think Indigo will force even bears to admit it," Sanderson wrote.

It is what investors and analysts will be watching for in the company's earnings call. RIM's plan with respect to Indigo and the company's plans to ship it could determine investors' short-term view.