Re: The current P/E ratio for the sector as a whole is 25.14. (See page 6.) Based on an average P/E of 25, when RIM’s earning reach $100 million, assuming the current 322 million shares outstanding, the projected stock price is $7.76.
If this truly came from Reuters, then I have to say that this is the most pathetic bit of analysis I have ever seen. Please allow me to shoot some truck-sized holes in this projection:
Given the ridiculous earnings prediction of $100MM, let's be extremely generous and use Intel as an example to determine net margin. Intel's recent earnings statement shows a net margin of about 15%. This is more than fair as a model, since Intel fabs their own chips, and RIM claims to be "fabless". Given the 15% net margin, that equates to a gross revenue of $667MM.
Now, I have cited sources many times that put the upper-end cost per port for xDSL chipsets to be about $15. So, in order to book $667MM in revenue, RIM would need to sell over 44 million ports. This represents about 55% of the entire market, and more than 100% or the VDSL market.
So, in summary, to meet these Reuters projections, RIM would need to completely take over the xDSL market and become a virtual monopoly in the VDSL market - and that is using generous assumptions.
Contrast that with, for example, Ikanos. They have what is still the fastest xDSL chips on the market. They are currently shipping their third generation of chips, and have been producing revenue for over 3 years. Yet, despite being an industry leader, they have shipped only about 6 million ports since inception. Last year, their best year, they booked $85MM in revenue and showed $2.7MM in earnings.
Note the net margin for Ikanos. On $85 million, they netted $2.7MM, or a 3% margin. This is typical of the semiconductor industry. It takes a great deal of volume to get to high margins.
So, let's just make some ridiculously optimistic assumptions and say for the moment that RIM will surpass Ikanos next year, and book revenues of $100MM. In other words, we are assuming that RIM will do more in one year what Ikanos did in three. Let's also assume (ridiculously) that RIM can somehow extract a 5% margin from $100MM where Ikanos can only get 3%. We will also assume that by next year, the OS count will have doubled to 650 million.
Now, we have 5% margin on $100 million, or $5 million in earnings. That's 0.7 cents per share in earnings. Using an industry P/E ratio of 25, you get a share price of $0.19.
So, we are assuming that RIM can do more in one year than Ikanos did in 3, and that RIM can somehow almost double the net margin of Ikanos, and assuming that the full 900,000,000 shares are not outstanding in the same time period. Even with these ridiculously optimistic assumptions, the share price upside is limited to $0.06.
Don't let the facts cloud your wishful thinking, though.
AI
