Shares of Research In Motion (RIMM – NASDAQ) have undergone a sharp correction in recent days. The market was not impress by RIM Q1 results despite a 23% increase in profits and revenues. After this correction, the gap between current valuation and it’s valuation from two years ago is nothing less than phenomenal! On July 3, 2008, the stock of the BlackBerry maker was trading at $ 115 U.S. or 51 times their $ 2.26 profit from fiscal 2008 (ended March 1, 2008). On July 2, 2010, becoming a RIM shareholder costs a whopping $ 48 equivalent to 11 times the EPS of $ 4.32 from fiscal 2010.
According to Mr. Market, a company that almost doubled its profits and increased its revenues from 6 to 15 billion in two years deserve a price/earnings ratio similar to Pfizer ! In my opinion, such a low valuation is probably the result of the market general pessimism combined with the obsession of the media for a company named Apple. The reasoning seems to go as follows: RIM is not anymore the dominant player in the smartphone market because of competition from Apple and Google, so the company is basically worthless! QED !
It is obvious that a company trading at 50 times its profits must absolutely stay the dominant player in its sector for its shareholders to have any hope of enrichment. The interest in RIM current stock price is that global and interplanetary domination is no longer a need to provide an attractive return. The smartphone market is still in its infancy. The term “smartphone” will itself be obsolete in a few years when all mobile phones will be smart. As sexy are Apple and Google products, they probably won’t have 100% of this market. RIM may loose its number 1 position, but remains well positioned to be a major player.
The skepticism vis-à-vis the Waterloo firm does not date from yesterday. Currently, many analysts fear that the next generation of products to be unveiled within weeks may not be up to par. It could be, but we must not forget that RIM has always delivered the goods in terms of product quality and innovation. Since 1997, the company confounds skeptics on a regular basis. Its CEO and founder Mike Lazaridis is a genius who belongs to the same league as Steve Jobs.
In short, RIM sells to less than 10 times expected profits for this fiscal year. The company is well positioned in a market poised for strong growth in the coming years. Expectations are low despite its history of success. From an investor perspective, the risk/reward equation is very attractive. Buy quality when no one wants has always been the winning recipe of stock market riches.
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