Bet on the new BlackBerry

By Robert Walberg

Research in Motion (RIMM, news, msgs) launched its long-awaited BlackBerry Pearl and the stock fell. Why? Maybe Thursday's 1.4% decline was related to rival Palm's (PALM, news, msgs) revenue warning or simply a case of buy-the-rumor, sell-the-fact.

But investors shouldn't worry -- the company is better positioned to take on the competition and gain market share than at any time in recent memory. Its shares could easily soar to the $93-to-$95 range.

As I noted a few months ago, the competition failed to deliver a knockout punch while Research in Motion was embroiled in a long legal battle. Its share of the North American wireless e-mail market dropped 11 percentage points to 70% in 2005, according to research firm Gartner. Yet Palm, Nokia (NOK, news, msgs) and Motorola (MOT, news, msgs) weren't able to dethrone BlackBerries in the corporate world. Now Research in Motion is going after the larger -- though more volatile -- consumer market.

From substance to style

Even if you've never used a BlackBerry, you've probably seen one. About the size of a pack of cigarettes, the devices were designed to be sturdy, functional and secure -- a business person's PDA. Noted for their e-mail capabilities and their state-of-the-art security, BlackBerry is so addictive in the corporate world that they're jokingly called "crackberries."

But the company couldn't crack the consumer market because the traditional BlackBerry was ugly and lacked features such as built-in cameras and MP3 functionality. Enter the Pearl. Sleek, handsome and loaded with enough gadgets to please the average consumer, the company hit a home run in its first trip to the plate.

While Motorola's inexpensive QPhone has so far failed to steal much of the corporate market, RIMM's Pearl easily stands its ground against the Q among consumers. The keyboard is smaller and the MP3 functionality is limited, but the Pearl is sexy enough to piggyback off BlackBerry's success elsewhere to win converts among fickle consumers -- especially given its attractive $199 price (with a contract).

Palm too pricey

Palm also has a very loyal following. But two consecutive quarters with revenue warnings suggests that increasing competition and the industry's aggressive pricing is taking a toll. The Q and the Pearl are both priced about $100 less than Palm's Treo, which will certainly contribute to lost market share and declining margins.

But bad news for Palm isn't bad news for the entire industry. In fact, the warning from Palm should be seen as potentially good news for its rivals. Any short-term weakness in Research in Motion should be seen as a good long-term buying opportunity.

Although not perfect, the new Pearl exceeded expectations and qualifies as a strong entry candidate into the burgeoning consumer marketplace. If the company continues to fine-tune the Pearl with the same tenacity that it showed with corporate BlackBerries then Palm, Motorola, Nokia and T-Mobile beware.

Strong growth over several quarters

Research in Motion is poised to ride the Pearl to strong growth over the next several quarters. Wall Street expects earnings to grow by 18% in fiscal year 2007 and by 25% in fiscal year 2008. Sales are also expected to grow by better than 22% per year.

If the company merely hits its targets, it should have no trouble commanding a multiple of at least 25-times future earnings. Shareholders can forget about Thursday's minor setback and relax, sit back and enjoy the upward ride.

Robert Walberg is a financial writer based in Chicago, Ill. He was formerly chief equity analyst at Briefing.com. He is a regular guest on CNN's Moneyline. Mr. Walberg ran for Congress in Illinois in 1994.

At the time of publication, Robert Walberg did not own or control shares of any companies mentioned in this article.