Research In Motion Ltd.
International Opportunity
Provides Next Leg of Growth
We are initiating coverage of RIMM with an Overweight rating and a $90 price target as we believe the unit volume opportunity internationally is great enough to materially offset inevitable share loss in North America from iPhone and Android. With the entire smartphone market growing 37% from ’09 thru ’13 and the steadily increasing cashflow from the 80%+ gross margin Services business providing profitability support, we calculate revenue growth of 21% thru FY13 for a stock trading at 13x our CY10 EPS estimate of $5.12, the same multiple as Nokia.
We expect RIM to take smartphone share from Nokia in Europe, while in China – where the only phone RIM currently sells is the 4-year old 8700 – recent agreements with China Mobile and China Telecom could generate up to 3-4M additional units/qtr by 2013 leading to 2½ points of smartphone share gain outside of North America from China alone.
We believe most of the gross margin compression is behind us and expect gross margins to remain steady despite modeling 8% annual declines in ASP as the portfolio shifts into the midrange as we believe margin is similar on international devices as domestic while the 80%+ margin services revenue adds support.
We believe RIM’s vertically integrated operating system offset its current OS deficiencies and while RIM’s operating system lacks many of the consumerfocused features of iPhone, Android and Palm, we believe those features are less important in developing markets where data speeds are lower and there is still plenty of untapped demand for mobile email.
We also expect RIM to roll out major upgrades to its browser and OS in 2010 setting up 2011 for a potential re-focus on the US consumer market.
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