Shares of Research In Motion (RIMM) have decreased tremendously over the past few years. What should RIMM investors expect in the short-, medium- and long-term future?
According to data from Morningstar, with Q3 revenue of $2,873 million, RIMM saw a decrease of 31% year over year in sales. The company had a $235 million net loss in the third quarter ($329 million net income in Q3 2011). Nokia's operating margin has reached a negative mark of -5.5%, when compared to the industry average of 15.0%. EPS growth (three-year average) of -12.4 also looks extremely negative and is far below the industry average of 9.0.
As of Nov. 22, 2012, the company's 52-week range spans from $6.22 to $18.77. The TTM P/E ratio has reached the negative mark of -8.77. The TTM ROE of -6.4 is far below the industry average of 8.2. However, RIMM follows a safe debt policy, with a zero debt/equity ratio. RIMM's beta of 1.62 illustrates how the company's products are highly demand-dependent, and that changes in global demand are likely to greatly affect this company.
Out of the 22 analysts evaluating RIMM, one recommends it as a Buy, three have Outperform ratings, 14 prefer the neutral Hold rating, one has an Underperform rating, and the last three have a Sell rating. This situation creates a bit of uncertainty for the average retail investor -- should he or she jump in with both feet (buy or sell) or remain on the sidelines (hold) for the time being until additional guidance is received?
What Does the Future Hold?
The "high" and "low" stock trendlines are very helpful in predicting the future behavior of a stock relative to its past and current movements. We will use "high" and "low" stock trends to connect the dots in order to gain an idea of how the stock will most likely behave in the short, medium, and long run. Specifically for RIMM, we will do this in three forms, which will represent different periods.
1. Short Term (Three-Month Period)
Click to enlarge images.
The red, dotted "low" stock trendline below the stock trendline represents the bottom of RIMM's stock price or the support level. The points touching the red line are the press points where the stock price is pressured to reverse. Hence, these are also the times when investors can grab the opportunity to buy the stock. On the other hand, the green line, which should always be parallel to the red line, represents the resistance level. All peaks falling below or touching this line are expected to experience a downward correction of the market. Hence, stock prices above the points on this green line are expected to fall.
Now, looking into the trendline of RIMM, the "high" and "low" trendlines suggest that RIMM's stock price will most likely appreciate in the short run. This is because it has not touched the resistance level yet, and it will most likely approach that line before reversing and touching the support level. Hence, if we base our decision on these lines, investors are advised to buy the stock.
2. Medium Term (Three-Year Period)
On the other hand, the movement of RIMM's stock price in the medium term suggests the reverse of what the short-term chart above shows. This is because the short-term chart shows a bullish market, while this chart obviously illustrates a bearish market. In this instance, the general conclusion of anyone analyzing this would be to a sell position. But is that correct?
Digging into this deeper, the red line still represents the support level while the green line is the resistance level. Looking toward the lower-right of RIMM's trendline, it is obvious that the stock price goes beyond the upper limit, the resistance level. Normally, the stock price should already be falling and experiencing the corrective influence of the market. However, those points represent a breakout. Hence, a new resistance level should be introduced, which is represented by the black line. It must be noted that the distance between the black line and green line should be equal to the distance of the red line from the green line.
Having a second resistance level, it seems as if RIMM's stock price will move toward touching the black line. Hence, we can confirm the short-term conclusion that the stock is a "buy" in the coming days. Nevertheless, since it is still obviously a bearish market, I would suggest that investors should be cautious and sell it in the medium term.
3. Long Term (Five-Year Period)
Now, moving to long-term decision-making, the chart above still shows a bearish market, since the stock price is downward sloping. However, if traders compare the slope of the resistance and support level to the lines in the medium-term chart, it will be noticed that it is almost flat and not too steep. This only shows that even though RIMM's stock price has been decreasing since 2008, its rate would be smaller in the long run. In other words, the price drops would possibly be smaller.
Consistent with the medium-term prediction, the stock price of RIMM could reverse in the long run and approach the resistance level. Hence, it means that investors can technically expect that its price will appreciate in the coming years. Also, it has already been a considerable period of time that RIMM's stock price has remained near the support level. In this regard, a stock price increase would be possible.
Combining all the things noted above, I currently consider RIMM a "hold" option because of its poor performance as well as extremely undervalued price of about $10. The TTM net loss of the company has already plunged to $613 million. Even though its P/S ratio is 0.4, which means investors are paying less per unit sale and it also suggests that the company is unprofitable. In this regard, RIMM is considered as an unprofitable investment.
Furthermore, its low P/B ratio of 0.6 suggests that that RIMM is, indeed, undervalued. Aside from that, this indicator also tells investors that there is something wrong with this company. This is much lower than the industry average of 1.9. Its P/E ratio is negative as well. This only goes to show that investors are not expecting anything particularly positive from this stock in the long run.
Investors can expect little gain from RIMM in the short run, and definitely not in the long run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.