Predictions of Research In Motion's fiscal first-quarter results were undoubtedly high, and the 11 percent sell-off in its shares this morning proves just how lofty investor expectations had become.
Profit and revenue more than doubled from a year ago as BlackBerry demand surged among both core business clients and new retail users, who made up 60 percent of the company's 2.3 million new subscribers in the quarter.
The problem? Operating expenses rose 22 percent, and gross margins slipped to 50.7 percent from 51.8 percent.
Analysts were quick to point out that RIM is spending money to make money:
Citigroup: "Our view is that RIM is investing to capitalize on the unique growth opportunities here and now: increasing consumer adoption of smartphones, juicy carrier subsidies, and limited (albeit increasing) competition. We think RIM made the tough decision (investor angst, Wall Street criticism) to forgo short-term profit for longer-term growth."
Oppenheimer: "We view the spending as a necessary evil and look for it to drive strong share gains, and, as scale grows, operating leverage should return. RIM remains one of our top picks, and we would take advantage of weakness as a buying opportunity."
Then there are concerns that the mobile phone market is slowing with the weaker economy.
Cowen analysts say that's overblown and add that while the economy will hurt mobile phone sales a bit, they'll still rise 13.4 to 15.2 percent in the second half compared with the first, on the back of new products from RIM, Apple, and Nokia, plus strength in Latin America and western Europe. They also note that those estimates are fairly conservative, given mobile phones' 18 percent gain back in the second half of 2001 versus the first half, when the economy was in a recession.
Basically, the market is expecting the worst second half vs. first half growth ever in the sector, and that could mean expectations have fallen too far for a growing smartphone market.