Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM) will launch its BlackBerry 10 (BB10) smartphone early next year. The general assumption is that the company will be looking to use the new device in getting back to profitability. However, according to analyst opinion from a cross-section of Buy-side analysts, RIM may struggle to get back to its glory days. The smartphone industry is becoming tough by day, and companies are being forced to quote minimal to near zero margins on their devices.
In a report published Friday, Raymond James analysts maintained their Market Perform rating on the Canadian based tech giant. The analysts carried out sensitivity analysis with regard to the impact of BB10 to the company’s revenues and consequently, profitability.
In the report, the analysts wrote, “we provide a simplistic sensitivity analysis of Blackberry 10 sales to Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM)’s revenues and EPS. We estimate that Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM) would have to sell roughly 18 million Blackberry 10 devices at solid economics (~$100 gross profit/device) in order to recover to break-even profitability”.
The task of selling 18 million units of BB10 at a mark up of ~$100 sounds simple. However, the analysts earmark that the headwinds are enormous. The analysts estimate that about 880 million units of smartphones will be sold in FY2013. Therefore, selling 18 million out of the 880 million should be an easy task. Notwithstanding, Finnish based mobile and smartphone maker Nokia Corporation (NYSE:NOK) can only serve as a perfect caveat. The fallen giant has only managed 10 million units of its Lumia phones in about a year.
Nonetheless, Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM) could yet be holding a slight advantage over its Finnish-based rival. While Nokia outsourced its Lumia phones’ OS (Windows Phone) from Microsoft Corporation (NASDAQ:MSFT), RIM is vertically integrated and does manufacture its own OS (BlackBerry) along with the devices. Therefore, RIM can afford some good margin on its devices, contrary to Nokia, which the analysts estimated to be flat, or negative.
Indeed, Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM) seems to be thwarting the hopes of several analysts, include the Sell-side analysts. John Paczkowski of All Things D quoted Ehud Gelblum of Morgan Stanley (NYSE:MS) in a statement as having said, “We continue to believe BlackBerry 10 has a low chance of success. While some of the new features on BB10 seem innovative, we had a similar reaction to Palm’s webOS when we saw it at CES in 2009. Ultimately we believe BB10 is too late, and subs continue to shift to competitive devices”.
Raymond James underlined the following factoid as a major reason toward their skepticism on RIM.
Before the onset of Android, nearly every smartphone OS launched was at least modestly successful, and created a profitable ecosystem (Symbian, Windows Mobile, Palm, Blackberry, iOS). After Android, not a single new OS has been successful (WebOS, Meego, Bada, and Windows Phone so far). Indeed, Android now commands more than 68 percent of the global smartphone platform.
Vertical integration is the key thing with RIM and BB10. Indeed, the analysts believe that vertical integration will help RIM differentiate from the likes of Android, and Windows Phone OS. My opinion is, this integration can only help RIM against the smaller competitors like Windows Phone, but not Android. Google has already established its OS as a market force to reckon with, regardless of whether it manufactures its own smartphone devices. Mind you, it has already put on the armor in readiness for the battle in tablets devices. Additionally, it has acquired Motorola Mobility as a venture into the smartphones industry.
The analysts noted, “although the ability for RIM to return to meaningful profitability will be an uphill battle, a somewhat successful BB10 launch could pique the interest of other players wanting to differentiate their smartphone offerings or enter the smartphone market without having to resell someone else’s OS”.
At the time of this writing, Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM) stock was trading at $11.13, down $0.85 per share, or a 7.09% decline from yesterday’s close.