Back in late September, the prospects for Research In Motion (NASDAQ:RIMM) looked bleak. The company was dogged with delays of its BlackBerry 10 (BB10) operating system, and the stock fell to $6.30.
But since then, Wall Street has become much more optimistic. Consider that the stock price is now at $14.91.
So, is this rally sustainable? Or will there be a pullback? To see, here’s a look at the pros and cons:
Next-Generation System. BB10, which will launch on Jan. 30, is certainly getting lots of buzz. RIM will also launch a new phone based on the technology by Feb. 28.
Enterprise Business. This is really the gem of RIM. Over the years, the company has built an entrenched customer base of thousands of corporations, which have made substantial investments in integrating BlackBerry phones in their info-tech systems.
Valuation. Even with the stock’s recent run-up, RIMM shares still trade at a cheap level. The price-to-sales ratio is only 0.55, and the enterprise-to-EBITDA multiple is 2.74.
The company also has a cash position of $2.9 billion, which compares to a market cap of $7.6 billion, and it owns an extensive patent portfolio.
Competition. RIM has fierce rivals like Apple‘s (NASDAQ:AAPL) iOS and Google‘s (NASDAQ:GOOG) Android devices. Even Microsoft’s (NASDAQ:MSFT) Windows 8 system is getting traction with Nokia (NYSE:NOK).
From 2009 to 2012, RIM’s market share has plunged from 21% to 5%, and that made it tough to get interest from developers to create apps for the company’s platform.
Services. This accounts for about a third of RIM’s revenues. However, in the latest quarterly report, the company indicated that it will make significant changes to pricing (it seems corporate customers have been pushing back). If there is a material drop in revenues, there could be lots of pressure on cash flows.
Tablets. RIM’s PlayBook offering has been horrible. In the latest quarter, the company shipped only 255,000 units.
Even though it looks like the tablet market will continue to grow at the expense of the PC industry, it’ll get tougher for RIM to find success because of the surge in competition, even from players like Amazon (NASDAQ:AMZN).
In the next couple quarters, RIM is likely to see continued momentum. The company should get lots of uptake from its BB10 system by leveraging the existing customer base. Hey, they’ve waited a long time for something new!
But after this, RIM will need to continue to innovate and keep up with its rivals. No doubt, this won’t be easy. And the company has had a history of falling behind.
At the same time, RIM’s services business will probably keep deteriorating.
So, at least for the short run, the pros outweigh the cons for RIM. But for investors looking for a long-term holding, this is probably not a good choice.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.