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25% Skim on RIM:

The market reaction wasn’t pretty in response to Research In Motion (RIM) today after releasing their earnings Thursday evening after the market closed when concerns over margins were raised as gross margins fell.

RIM is an interesting stock for a number of reasons:

  • It’s the stock I got burnt on badly in a stock picking contest in business school back in 2000
  • I have two close friends who work as engineers at the Waterloo, Ontario based company
  • The fundamentals of its business model are very strong and growing

Despite significant competition in the consumer market, job losses and cuts in spending by financial institutions on the corporate side of business, RIM continues to meet both revenue forecasts and new subscriber targets in each successive quarter. The premium on this growth stock has recently dropped dramatically as a number of investors consider the short-term effects of various risks.

But RIM makes a superior business product, has a dominant software infrastructure and their market share outside of North America is still low and growing. The company has proven that it can continue to innovate and meet the demands & expectations of its customers with new products and has diversified itself away from just one product line.

At a conservative target of $3.55 EPS for 2009 RIM currently trades around 21x forward earnings which does seem high at first glance. But there’s been no tangible decrease in demand, costs continue to meet management’s targets and the company’s products continue to penetrate the consumer market. As consumers begin using features of a blackberry that they’ve never had access to before early adoption is leading to more useage of their products.

While I continue to see RIM as over-valued I will likely take some time this weekend to examine the company more closely. Friends employed with the company have on more than one occasion hinted at various products in development at the company and that the upcoming product pipeline is has both depth and diversity for its target markets.

This is a wonderfully managed company with strong relationships with its target market and although many investors view this as a one-stock-show (AAPL vs. RIM) I continue to see strength in the operations of both.

The consumer market is difficult to predict on frequent occasions, but RIM does a good job of always leaving consumers wanting just a little more in the next updated Blackberry. They have the unique ability to capture a market and then keep them using their products for sustained periods of time. Competition is healthy for any company and RIM certainly has lots, but at less than 20x 2009 EPS this value investor might begin to raise an eyebrow towards RIM as a prospective investment for 2009.

See it on Seeking Alpha

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