What Stock Analysts Are Missing on RIM

As the end of each month, year and quarter arrive, there appears in advance of these deadlines various releases from stock analysts, providing their predictions on “the numbers”. They focus primarily on the anticipated values, with often vague reasoning behind them. Too often, that reasoning overlooks some very fundamental issues, and tend to look at the very, very short term, typically no more than 1 quarter either before or after the upcoming date. As an example, some analysts are expecting RIM to, again, meet or beat certain standard metrics such as revenue, profit or EBITDA. RIM has done well, financially, but unfortunately, those numbers mask the bigger problem. Some of the investors get it, which is why (some like Jaguar Financial) are calling for change now, rather than waiting until things are dire.

As I said, financially, RIM has done well, both recently and historically. Company executives try to use this as a defence against major change, as do some analysts and supporters. The thinking goes something like this: we’re still increasing the number of units sold, and increasing our revenue and profit numbers alongside that, so why would we want to risk that by making big changes? The idea is that the “big numbers”, the ones that matter most to analysts and investors, are good now. Making significant changes in senior staff, product direction or business strategies risks damaging those numbers in the short term.

Here’s the problem with that kind of thinking: it masks the fact that RIM’s marketshare is down considerably, and is getting smaller all of the time. The saying “a rising tide lifts all boats” comes into play here: the smartphone market continues to expand, since it still represents less than half of all handsets sold to, or owned by, mobile phone buyers. Because there are still many new customers to be gained, RIM can expect to continue to sell new smartphones to people who previously owned a feature phone. But, while a rising tide will lift a boat, it doesn’t keep it from sinking, and focusing purely on revenue, profits and units sold in isolation means that you miss the point. This is akin to asking Captain Smith of the RMS Titanic the state of the engines shortly after hitting the iceberg: the engines were still good, and in top working order. The fact that they were attached to a sinking ship meant that their ability to move the ship was a moot point. Sure, the ship could still make speed, but that wasn’t going to help them. Really, Titanic’s “key numbers” overall were still very good: the ship could still make top speed, it still had power, and the hull was largely intact. Oh, except for that one part near the bow. But, if you ignored that one problem, the rest of the ship was in great shape.

I’m not so worried about stock analysts (because, quite frankly, I ignore most of their predictions anyways), but more about RIM management, who seem to be buying into the press clippings: the analysts are saying “RIM will have good numbers” and the top brass seem to interpret that as “RIM is doing a good job” or “RIM is doing the right thing”. Here’s a hint: revenue comes from selling products and services, not from making analysts happy. People buy products because they actually need them, believe they need them (even if they don’t) or simply just want them. People are still buying Blackberries, but their uptake rate is smaller than iPhones or Androids, and the rate of uptake is slowing, relative to the other guys. Concentrating on moving more units this quarter, but still shrinking marketshare, is short-term thinking, and at some point, the marketshare dives to the point where no one cares anymore. It is at that point carriers start to wonder why they should subsidize a marginal device, and people who may be interested aren’t anymore because no one they know has a device. Then it all starts to spiral down, until the company is in such shape that it’s either a potential bargain sale item, or looking for protection from creditors while it reorganizes.

Now is the time for RIM to start to make some changes, and ignore the rosy numbers picture that the current financials paint, and analysts largely focus on. Now is when the company needs to start rebuilding their vision, while they still have cash, revenue and marketshare worth discussing.  Don’t try to draw people’s attention to the fact that the company’s engines are still functioning, the ship has power and 99.9% of the hull is intact. Instead, build a plan to address the issues that are causing the ship to take on water: reduced marketshare and decreased growth relative to their competition. A ship that is still afloat can potentially be saved. A ship on the seabed beneath the ocean can’t.

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