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While Research in Motion's (RIM-T) phones have lost ground to competitors such as Apple and Google, the company and analysts have long highlighted its thriving and profitable services business.
But Northern Securities' Sameet Kanade says even that business is now under pressure.
"We have now elected to heavily discount such representations as we believe the core 'cash cow' network service business of RIM is at risk of significant decline over the next 12 month period," he says.
Kanade downgraded RIM to 'sell' and dropped his price target for the stock to $7.
"We admit that our acceptance of the Company's representations at face value was shortsighted, given the recent checkered past of management's ability to comprehend and tackle competitive challenges to its position," he says.
"We now firmly believe that RIM does not have the luxury of time on its side and expect a significant compression in service revenue from [second half of 2012] onwards. This is expected to lead to net cash outflows, and may potentially erode RIM's balance sheet strength."
Kanade expects the revenue per month from each subscriber to fall to $2 per month by the fourth quarter of 2013
Kanade previously had a $24 price target on the Waterloo-based company, says his bullish call was based on revenue generated by the services sector -- whose 75 million subscribers contribute $5 per month into RIM's coffers. Kanade says he thought the revenue generated by the services sector "would provide room for the new management team to get its QNX device strategy in order."
He also said the company's strong international footprint was behind his bullish call.
Kanade says RIM is expected to be a "price taker" when it sells its handsets, as vendors increasingly opt for phones from Apple and Samsung.
"Based on our assessment of the competition and checks with major carrier partners, especially in emerging markets, we expect the decline in RIM's device Average Selling Price to accelerate to the sub-$200 level within the next 12 months," he says.