RIM's "Irrational Exuberance"


There are downgrades, and there are downgrades, but I have never seen the kind of downgrade parade marching through Wall Street this morning related to Research in Motion and its stock.

The company's second quarter earnings were disappointing, but RIM's guidance was downright depressing. Margins will be squeezed, new subscriptions aren't measuring up, and the sales and marketing expenses appear to be dramatically out of whack as this company tries to sell the variety of new BlackBerrys in its product pipeline.

That stuffed product pipeline should normally be a positive for a company like RIM, especially with oncoming competition from Apple'siPhone, Nokia, Microsoft,Google. You know the list.

But it becomes a big-time negative when you find out that RIM spent that surprisingly huge $380 million to market all this stuff. And Wall Street is none too pleased. These downgrades this morning are so steep, so strong, so fast that they carry a negative G-force.

Canaccord Adams took its target from $185 to $72.50. RBC went from $165 to $90. Credit Suisse went from $100 to $80. These are brutal. RIM shares are in meltdown.

How did the Street, indeed so many of us, get this one wrong? Simply, there's been an almost irrational exuberance surrounding this can't-do-wrong company. Metrics and channel checks seemed solid. Same with ongoing trends. Almost across the board among analyst research.

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And that's true: demand IS strong. Sell-through for BlackBerrys has indeed been strong. The trouble for analysts and investors: no one knows how RIM will price new products. And when those prices come in far lower than expected, they contribute to earnings misses, kill margins and slash average selling prices. That's a big problem for companies selling a variety of handsets across a number of smart phone sub-sectors. This indeed could be a harbinger of similar problems for Nokia.

But not Apple. iPhone pricing is set. It doesn't change until Steve Jobs announces a price change. With iPhone pricing, you know what to expect. AT&T has no latitude to adjust it. Which means no ASP surprises come earnings time.

If the market is there, and Apple meets or beats iPhone sales projections, today's sympathy slide with RIM shares could mark a significant opportunity. Again. If RIM's numbers suggest a smart phone slowdown--which I don't think they do--Apple will be hurting too. I just don't think the evidence is there to support that, yet.

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