Can RIM Cease Wild Swings?

Analysts Balance Dominance
With Dangers in Patent Case;

Sizing Up a 'Short Squeeze'

Research in Motion Ltd. is at a pivotal point: Shares of the BlackBerry maker, based in Waterloo, Ontario, plunged more than 10% midday last Wednesday -- only to finish up 1.6% -- after the U.S. Supreme Court denied an emergency appeal to halt RIM's long-running patent battle with NTP Inc. Analysts called the slide a knee-jerk reaction to a ruling that had been widely expected. But the stock volatility highlights the sensitivity surrounding RIM, which faces new threats to its control of the wireless-device market -- RIM announced a new version of the BlackBerry on Tuesday -- and the possibility of an unsettling end to the patent case, such as profit-sapping royalty payments. Analysts break down the positives and negatives for RIM's stock. (Disclosures follow.)

The Bull Case

Market Muscle: RIM is the leader in a market that could grow as much as 100% over the next year, according to Lehman Brothers. Analysts Jeff Kvaal and Tim Luke write that "despite expectations of rapid subscriber growth," RIM competitors "in general do not believe they are gaining market share." Morgan Keegan's Tavis McCourt heralds RIM's "strong strategic position" -- it's often referred to as CrackBerry -- at a time when only 1% of corporate email accounts world-wide are wirelessly enabled, according to his research. He expects RIM's growth to slow but to remain in the double digits "well into the foreseeable future." Paradigm Capital's Barry Richards writes that competing devices "consistently fail" to measure up to the BlackBerry when it comes to ease of use, battery life, durability, level of security and price point.

Silver Lining: A settlement with NTP -- the most likely scenario -- will cost RIM at least $450 million, analysts say. But it would end a great deal of volatility that RBC Capital Markets' Mike Abramsky says contributes to RIM's "fear discount." Mr. McCourt shares the sentiment, reiterating an "outperform" rating on the shares. He writes that NTP needs the settlement cash to "monetize its patent portfolio … With this in mind, we find it doubtful that NTP will seek to kill or even seriously harm its golden goose." A settlement could also trigger a wave of buying by short-sellers covering their bets that the stock would fall. With short interest outstanding at 10.3%, "we believe the possibility of a sizable short squeeze is likely on any positive news flow such as a NTP settlement," Mr. Abramsky writes.

Smartphone Suitor? RIM closed Tuesday at $60.52 a share -- an attractive price that has a few RIM analysts speculating in their research notes about an acquisition. Paradigm's Mr. Richards says the "recent discount applied to RIM for competition and legal uncertainty is way overdone." He writes that Nokia is in a good spot to pull off an acquisition, noting that "this is the first time that firms like Nokia could acquire RIM without the worry of an earnings-dilutive transaction." What's more, he says, the relationship between RIM and Nokia "seems closer than ever," noting numerous deals lately for BlackBerry-enabled Nokia devices. Mr. Abramsky also calls RIM an attractive acquisition candidate, saying "investor downside is limited" and naming Nokia, IBM, Microsoft and Motorola suitable buyers.

The Bear Case

Price of Competition: Attractive BlackBerry alternatives are becoming more readily available, threatening RIM's dominance and plans for international expansion. The Nokia E61 and the Motorola Q will be available in the next few months and Microsoft's Mobile OS service will soon be available on a broader range of devices. Deutsche Bank's Brian Modoff expects the latest Nokia and Motorola offerings to initially undercut the BlackBerry on price, pressuring RIM's hardware business, which makes up 70% of its revenue. "This will also likely increase operating expenses as the company will have to spend more on developing new devices and marketing their products," Mr. Modoff writes. Daan Coster of Rochdale Research expects competition to hurt most overseas because "international customers have much less loyalty to the RIM brand than U.S. buyers … it's a much more even playing field."

Dis-Connect: BlackBerry Connect, software licensed for non-RIM devices, is gaining traction with companies like Palm and Nokia. Some analysts, though, say the program -- meant to broaden RIM's software sales -- will sap profit. "We believe that BlackBerry Connect/Built-in will generate little incremental business for RIM," Think Equity's Pablo Perez-Fernandez writes, reiterating a "sell" rating. The software will end up increasing market-share pressure from competing handsets, he wrote, as IT departments are given ways to ditch BlackBerry hardware. "BlackBerry Connect does not offer a 100% comparable alternative to RIM's core business [hardware]," Deutsche Bank's Mr. Modoff writes. He estimates RIM will have to sign up 2.5 Connect users to make up for each lost BlackBerry sale. "With Nokia's recent moves … we think it will be difficult for RIM to deliver profitable growth with Connect devices."

Litigation Losses: A $450 million settlement reached in March between NTP, a Virginia patent firm, and RIM fell apart for reasons neither has discussed. Rochdale's Mr. Coster thinks a potential snag could be whether RIM continues paying a royalty fee of 8.55% of sales. If RIM has to pay that royalty at a minimum going forward, it would slice fiscal 2007 profit from $3.38 a share to about $2.79, Mr. Coster estimates, using First Call's current consensus estimates. "We don't think that this scenario is completely factored into the stock yet," he writes, calling the royalty "onerous." Palm's "recent strong business is direct evidence that [the litigation] issue has driven some customers to consider other solutions more seriously than they had before," he writes.

Ratings

Disclosures

Write to Chris Bain at chris.bain@wsj.com