BlackBerry-maker Research In Motion Ltd.,(RIMM) recently announced that it will provide $485 million for losses relating to the overproduction of PlayBook tablets in the third quarter of 2012. However, the company said that this provision will be non-cash in nature.
In order to retain its market share as well as to counter competition, Research In Motion launched its much-hyped QNX-based PlayBook tablets in April, this year. During the quarter, the company shipped around 500,000 tablets. However, the market response for the product was tepid and resulted in increased inventory backlog for the company. In the very next quarter the shipment dropped to around 200,000 tablets, while in the ongoing quarter, the company reported nearly 150,000 tablet sales.
So, in order to clear out the inventory, Research In Motion reduced the price of the tablet from $499 to $200, thus selling it at a loss. Recently, Amazon.com Inc. (AMZN) also launched its low-cost tablet called Kindle Fire for $199. We believe that Research In Motion has selected Amazon’s tablet price as a benchmark to target the low-end market.
Earlier, Hewlett-Packard Company (HPQ) also experienced a similar situation where the company had to slash the price of its newly launched TouchPad tablet from $450 to $99, owing to lukewarm customer response. However, the demand for the product surged after reducing the price. Recently, the company is also planning to launch a higher version tablet called Slate 2 in this holiday season mainly targeting the business people.
Research In Motion is also following a similar strategy of selling the poor quality tablets at a lower price and rolling out the upgraded version of the PlayBook tablet based on the OS 2.0 software during this holiday season. Moreover, those low-end tablets come with an option of upgrading to the newer version.
We believe stiff competition from other Android-based smartphones and tablets coupled with Apple Inc.’s (AAPL) iPhones and iPads will result in loss of market share for the company. Moreover, Research In Motion is also giving away $100 applications free of cost to its customers who were dissatisfied with the company's service failure, and this will put further pressure on EPS, in our view.
However, we believe that the launch of BB7-based handsets along with the upcoming holiday season will certainly boost sales in the near term. Moreover, the company plans to launch their first QNX-based smartphones in the middle of 2012, which we believe will be accretive to the company’s revenue and will also help them regain market share.
We, thus, maintain our long-term Neutral recommendation for Research In Motion Ltd. Currently, the company has a Zacks #3 Rank, implying a short-term Hold rating on the stock.
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