RIMM - When it pays to be wrong

I guess it pays some guys to be wrong. And it pays the rest of us to take the opposing view of someone who has proven themselves to be wrong. On Dec 10, Morgan Keegan analyst Tavis McCourt published his views on RIMM, and told everyone that he thought there would be a “potential slowdown” in momentum on Blackberry sales.

Wasn’t that prescient? NOPE. Not even close. But that doesn’t matter for McCourt, because I’m sure that his bosses came up to him that day and patted him on the back for being the catalyst for an eventual 25% price decline in the stock. I shouldn’t give him that much credit, as the short interest on the stock had been rising, and he could have been on the receiving end of a call from a large hedge fund that told him about the channel check “work” that the hedge fund had done, and the negative results that they had found. When you go to three or four AT&T and T-Mobile retail stores in Tennessee, you are bound to get incorrect information, and extrapolate from those wrong results. The momentum style hedge funds that were long the stock, began to sell it hard, as they never want to be the last one looking for a chair when the music stops. A few days ago, a rumor was circulated that RIMM would announce a restatement of earnings yesterday – another rumor likely started by hedge funds that were short the stock.

So what’s the bottom line? Yesterday, RIMM announced another blow out quarter, and RAISED guidance once again. The result? McCourt looks like Bozo the clown externally, but like a hero inside Morgan Keegan and to hedge funds that were short the stock.

Actually, there are lots of investors who also like the guy as he provided a HUGE opportunity to everyone who wanted to buy the stock at cheaper prices than existing prior to Dec 10. Unfortunately for Tavis, he has become a contra-indicator – so he is useful, but for the wrong reasons. Today, McCourt is quoted in a Businessweek story suggesting that the $99 Pearl units sold by AT&T actually helped RIMM. (Too bad that McCourt suggested on Dec 10 that the $99 price point was evidence that the carriers were discounting the units, and hence, would lead to poor results. Opps).

http://www.businessweek.com/technology/content/dec2007/tc20071220_523525.htm?campaign_id=yhoo

The people who really drive me crazy are the media types like Dennis Kneale at CNBC who pass themselves off as analysts and commentators of the sector. So what’s the hallmark of someone who is taking the opposing view, but hasn't done their homework and/or hasn't really thought about their view, and is desperately trying to sound erudite? They talk about valuation multiples, and base those multiples on TRAILING earnings or revenues rather than forward earnings. During an interview with Maria Bartiromo and Jim Goldman on CNBC after RIMM had reported their blowout results, Dennis kept trying to sound knowledgeable and skeptical about the “high valuation”, so told everyone that the stock was trading at 70x earnings. What he didn’t say was that 70x multiple was based on TRAILING earnings. EVERYONE knows that Wall St. prices shares based on forward earnings, so why do these clowns use trailing numbers? Obviously, they are trying to make their case – albeit, they do so rather poorly, and expose themselves as sophists. Barron’s does this too, so it’s really easy to figure out their motivation and their bias. The multiple on forward multiples was going to be much lower – as RIMM had just raised guidance for the upcoming quarter, and that would force the analysts to increase their full year estimates for the following year.

The real story here is that RIMM has become the dominant vendor of smartphones in the WORLD, and has virtually no competition. There will be competition as there always is, but there is none today. PALM has been a pretender for at least 5 years. PALM has an interesting unit developed by Handspring founder Jeff Hawkins, but it’s been exceedingly clear for several YEARS that PALM does not have the supply chain relationships to deliver large quantities of cell phones, and they don’t have the solid relationships with wireless carriers to pre-order units. Delivering PDAs and mobile phones apparently is quite different. I know that may come as a surprise to some of these guys.

Motorola continues to be in complete disarray as well, and has ceded its position as a legitimate competitor. What about Apple and iPhone? A nice unit, but it’s a fashion accessory rather than a legitimate enterprise class mobile phone for the business user. Nokia, Samsung, HTC, LG and others are trying to produce smartphones that compete with Blackberries, but their main business is in the 10-key units. Moroever, the smartphones of those vendors can connect to RIM's data centers, so RIM get a small cut of those revenues as well.

So where is the stock going? In a word – UP. In two words – WAY UP.

RIMM has only 12 million subscribers today, and it has only scratched the surface of the billion wireless subscribers worldwide. Wireless carriers around the world have a huge incentive to sell the unit to its subscribers due to the data plans that subscribers will purchase when they purchase a smartphone like Blackberry. GSM carriers like AT&T and T-Mobile generate gross margins in the range of 85% plus when they sell a data plan, and CDMA carriers like Verizon and Sprint generate 95% plus margins when they sell a data plan. In other words, selling a smartphone like Blackberry is incredibly more profitable to the wireless carrier than selling a standard 10-key mobile phone like the Razor.

Moreover, RIM has hundreds of deep relationships with wireless carriers around the world, so collecting pre-orders for units is a little like the scene in movie Trading Places where Eddie Murphy and Dan Ackroyd are standing in the orange futures pit taking orders from all the traders who had bet on the wrong side of the trade, and were trying to cover their positions. RIM execs have big smiles on their faces as they take the orders. The small difference is that RIMM activities occur as a result of years of hard work, and it’s legal.

Going forward, RIMM begins to ship units to China in large numbers, and the Blackberry 9xxx series will be released in the near term. This is going to be a $200 stock when RIMM releases their Q4 results in March. Where will Tavis’ bosses and the boo birds be then?

One final note: Just because the stock is up 100% on the year, is NOT a valid reason to be skeptical about future growth. In reality, it just could be that the company deserves to grow 100% per year, and deserves a premium valuation. WOW!! - what a concept.