September 26, 2008 / 2:15 PM / 10 years ago

UPDATE 4-RIM stock plummets after profit forecast

By Susan Taylor

OTTAWA, Sept 26 (Reuters) - Research In Motion Ltd RIM.TO RIMM.O shares plunged 28 percent on Friday in their biggest one-day decline in eight years after the maker of BlackBerry smartphones revealed a profit outlook that was softer than analysts had expected.

RIM, which reported quarterly results after markets closed on Thursday, said it sees its gross profit margin getting pinched as it spends heavily to push into the consumer market with a new crop of BlackBerrys.

The dour outlook sparked a string of downgrades from analysts, unfamiliar territory for a market darling accustomed to fatter profits and upbeat guidance.

The Canadian high-tech star plummeted to close at $70.76 on Nasdaq and C$72.57 on the Toronto Stock Exchange, ending the session as the biggest net loser on both bourses.

Nearly 95 million shares traded hands on Nasdaq, about five times the daily average.

Dragged down by RIM’s declines, the Toronto Stock Exchange’s main index sank more than 3 percent and rival Apple Inc (AAPL.O) got caught in the wake, falling 2.8 percent on jitters that the whole sector could be in trouble. “People are concerned about the smartphone market,” said Cross Research analyst Shannon Cross.

Several analysts, surprised by RIM’s poor outlook, said the selloff represented a buying opportunity.

“We are disappointed that the weakness originates not in a temporary setback owing to a product transition but in a permanent step-down in gross margins,” JPMorgan analyst Paul Coster said in a note.

“That said, we believe this pullback is an excellent entry point into a tremendous growth stock, with the multiple at a multiyear low,” Coster said.

TD Newcrest analyst Chris Umiastowski said it appears that gross margins will drop by about 5 percent over the next two to three quarters.

“We believe the company is making a bet on market share at the expense of gross margin. We understand the bet and think it is a smart move,” Umiastowski wrote.

“But overall, the Street tends to be short-sighted, and this explains the slaughtering of the stock.”

For other investors, RIM’s future has suddenly become more difficult to predict, making the stock less attractive.

The Waterloo, Ontario-based company is revamping its product line to expand its customer base, introducing the BlackBerry Pearl flip this month, for example. The bulk of cell phones sold in the United States have a clamshell or flip design.

RIM is also preparing to launch a touch-screen phone to compete more directly with the iPhone.

The weak margin forecast reflects higher costs for new product launches, the inability to pass those costs on to customers and increased promotion expenses, said Deutsche Bank.

RBC Capital Markets analyst Mike Abramsky downgraded RIM to “sector perform” from “outperform”, citing uncertainty about the timing of margin recovery and increased risks to growth from economic woes.

UBS cut its rating to “neutral” from “buy” and lowered the stock’s target price to $88 from $165 because it has little conviction sales will grow in the near term.

“Despite the sell-off, we find it difficult to recommend investors step in at current levels, given headwind expectations and our lack of conviction to revenue growth upside, both near and medium term,” analysts Maynard Um and Jeffrey Fan said in a note.

For its third quarter, RIM expects earnings per share of between 89 and 97 cents — below analyst expectations — and said gross margin would drop to 47 percent from 50.7 percent in the second quarter. The margin is expected to deteriorate further in the fourth quarter.

It also forecast sales of $2.95 billion to $3.1 billion and the addition of 2.9 million subscribers. ($1=$1.03 Canadian) (With additional reporting by Jim Finkle in Boston; editing by Frank McGurty)

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