Research in Motion (RIMM), the Canadian maker of the popular Blackberry device, is taking a beating today, with its shares down more than 15% in early trading. The company reported weaker than expected revenue for the quarter ended in August and gave disappointing earnings guidance for the upcoming third. The news sparked a host of downgrades from the likes of Goldman Sachs, Deutsche Bank, and Raymond James, all of whom have expressed their doubt in RIMM’s ability to maintain market share in North America without slashing prices. After maintaining a stranglehold on the smartphone market for years, RIMM is now facing formidable competition from Apple, Palm and Motorola, and the impact on the bottom line is staggering. RIMM earned two cents per share more in last year’s quarter ending in August despite the fact that the company did over a billion dollars less in revenue, showing how quickly their margins have fallen in such a short period of time.
So the million dollar question is this: are RIMM’s troubles company-specific, or do they signal a challenging environment for the technology industry and technology ETFs? Many investors are counting on consumer and business spending on technology and other discretionary items to lead us out of the recession. But there are several indications that consumers and businesses aren’t quite ready to open up their wallets, a trend that could continue to weaken tech firms bottom lines.
Best Buy did a study in which 64% of those surveyed said they didn’t own a smartphone because they felt they were ‘too expensive’. Should the price come down to a more “consumer friendly” level, expect the number of smartphone owners (which currently stands at about 20% of the population), to rise dramatically in the next few years. Likewise, many businesses have cut out tech upgrades from their budget, electing to stretch old machines and infrastructure a little further.
There are a number of ETFs that stand to be impacted by the future of the smartphone market, including funds that invest in technologies that will assist manufacturers in creating better efficiencies and a longer battery life. The PowerShares Nanotech Portfolio (PXN) invests in firms that specialize in nanotechnology, while the iShares Goldman Sachs Semiconductor Index Fund (IGW) invests primarily in semiconductor producers. These industries could stand to benefit by providing the growing smartphone market with newer and better technology. For example, Samsung is due out with a 1GHz chip that would blow away Apple’s current processor, which runs at 600Mhz.
Another development is from Qualcomm, which is developing a 45 nanometer chip that would cut battery power usage by 30%. These technologies and many others will be extremely important for the ultra-competitive smartphone market as the main competitors look to gain an edge in any way possible in order to maintain and increase their market shares.
For those investors that are looking to add some Research In Motion to their portfolio, IGN, which has about 6% of its assets RIMM, is a good option. The fund has two thirds of its assets in telecom, stocks and the rest in hardware firms. It is down about 1.5% today but up 57% year to date.
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Disclosure: No positions at time of writing.