RIM Torch Has Slow Start, but Stock Is Still Better Value Than Apple

Research in Motion's stock (RIMM) has outperformed Apple's (AAPL) since I suggested that it would on July 6, despite report s of tepid sales for the new BlackBerry Torch. RIM's stock has lost 0.3 percent since the post appeared and Apple's is down 1.1 percent, although the gap was much greater before doubts about the Torch took a big bite out of RIM.

A reader named Dave has given me a chance to change my mind. Referring to a post I did on July 13 reiterating my belief that RIM was a better investment, Dave said in an email:

"You tout RIM over Apple, based upon an overblown antenna issue. Now [that] the latest 'iPhone killer,' the Torch, is a total bust, do you feel differently?"
Funny he should ask. No, I don't. I think recent developments, including his email, provide further evidence that RIM offers better prospects than Apple.

Dave appears to be confusing the companies' products with their investment outlook. It's possible - and quite common - for a so-so business to be a great stock if its financial performance exceeds investors' expectations for it.

That's an easy feat for RIM, a company that is seen as having lost its mojo and just can't get any respect from investors - certainly not from Dave. His proclamation that the Torch was "a total bust" came just two weeks after it was introduced.

He was alluding to widespread reports on Aug. 17 that Amazon.com had cut the price of the Torch in half, to $99.99 on two-year plans. RIM denied the reports - sort of - saying that Amazon (AMZN) had priced the Torch at that level since it went on sale on Aug. 12 to try to capture a $150 bounty that RIM pays Amazon for each new customer signed up.

The Amazon episode took about 15 percent out of RIM's share price, but RIM had fallen out of favor on Wall Street long before the Torch was introduced. Its stock has gone from more than $140 a share in early 2008 to $47.75 on Monday. Apple, by contrast, is nearly universally lauded and owned. That's what I was expressing caution about - that public admiration might have left Apple's stock priced precariously high and vulnerable to unforeseen developments, either so-so or outright adverse.

It has happened before - to RIM. If you look at a chart of RIM's stock through the 2000s to the 2008 peak, you might mistake it for Apple's chart of the last decade, right up until now. Wall Street couldn't imagine anything interfering with the BlackBerry's upward trajectory, not even the iPhone.

It's almost routine, in fact, for a high-flying stock to be waylaid by some unhelpful development, or even a lack of further promising ones. It provides a cruel reality check, knocking it right through fair value and all the way back to cheap.

I speculated that the reception problem of the iPhone 4, which Dave referred to in his email, would be the catalyst for some rough times for Apple, but something else could do the trick. The actual catalyst is beside the point.

What matters is that Apple is priced for continued success and RIM is priced for failure. Apple trades at 14 times analysts' estimates of next year's earnings and RIM trades at 8 times. Considering that those estimates reflect diverging views of the two companies, the discrepancy could even be greater.

If the Torch proves to be even marginally better than a total bust, RIM could rally. If the company tweaks it and customers actually start liking it - the phone has gotten decent, if not rave, reviews - the gain could be substantial. Either way, RIM's stock continues to hold its own and could offer more return potential with lower risk than many investors, including Dave, give it credit for.

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