Research in Motion (RIMM) has had a good run the last few weeks, from a low of $6.22 on Sept 24 to a high of $12.30 on Nov 29th, a 98% gain in just 66 days. This is even stronger than the parabolic gains from Apple's (AAPL) recent run up to $700. What is behind this noteworthy run?
Well, there are probably two main drivers - the much cited launch of the BB10 and very high short interest (22% as of 15 Nov). Together, these could be creating a perfect technical and fundamental storm with a little curiosity in the BB10 driving prices up, triggering a short squeeze. So the question at the moment - is this a short-term technical move or the start of a more fundamental bull run?
To answer this, let's look at the potential fundamental driver, the launch of the BB10 and a very common question - will the BB10 make RIM a growth stock once again?
For the BB10, there are two main audiences - consumers and business. In both cases, the BB10 is entering an already saturated market - with 101% penetration according to CTIA-The Wireless Association. With saturation this high, any growth will have to come from either converting traditional cell phone users to the BB10 smart phone or winning smart phone users away from their current platform. The allure of the BB10 can only come in two ways - breakthrough technology or price.
From the consumer view, the launch of the BB10 could bring some initial curiosity, but I think it will be very short lived. Looking at the publicly available material on the phone and the software, it appears to be just some interesting variants on the existing smart phone interfaces. Yes, there are some unique typing assist features, yes the ability to separate work and personal applications has some appeal in the business world (especially with the emergence of the "bring your own device" movement), and yes the ability to glance between applications is new ... fundamentally these are all just variations on a theme. So, short of a surprise on release day, there is nothing truly breakthrough here - nothing revolutionary.
If the new BB10 is not offering anything truly novel or breakthrough, this would put the launch as just a long overdue upgrade cycle. An upgrade will bring in some revenue from existing loyal customers and maybe win a few new customers based on the technology, but if RIM is to take market share it will be a slow churn as 1 and 2 year contracts come to an end and consumers get to select a new device. After the initial splash, this is a long 2 year road to win market share. Technology moves too quickly to keep attention that long to entice conversions with anything other than price.
Taking share based on price could come in at least three ways - lower list prices on the phones, incentives to change (e.g., buying out or subsidizing the change from existing contracts) and a high profile promotional advertising campaign. Any of these will either lower revenue or increase spending and net result in poor earnings performance and most likely eat into the good sized cash pile RIM has on hand.
From the business view, the BlackBerry's claim to fame is the global network and security. As cyber security threats continue to increase in scope and frequency, it is essential that organizations have some secure communication platform. Threats can come from any direction and so the protection must be robust. For example, witness Lockheed Martin's (LMT) security breach last year that came through a supplier's network. Hackers are looking for any way in and email is one of the many channels available. In the past, RIM has had superior technology to help combat this. With the launch of BB10, RIM is continuing its focus on security by achieving one of the industry's main standards even before the product launch - the US Federal Information Processing Standard (FIPS) 140-2. This gives them a leg up on the competition, mainly Apple, which is still working on this for the iPhone.
While this is good and will be part of their effort to retake leadership in security, how much does it matter? Several US Federal agencies already have or are in the process of switching from the BlackBerry to Apple, signaling a growing comfort level with the security the iPhone provides. Some of the agencies include the Federal Air Marshall Service, the US General Services Administration, U.S. Immigration and Customs Enforcement agency, the Coast Guard, and the Bureau of Alcohol, Tobacco, Firearms and Explosives. Even the Department of Defense has authorized the first use of iPhones and Androids as a replacement for the BlackBerry. The DoD has only approved this for only a tiny portion of their entire user base, but it shows the walls are cracking. With their lead in security slipping, this leaves RIM vulnerable on the business front as well.
A Key Barrier to Success
If we assume that RIM's strategy for reversing the trend and growing again relies upon taking market share, then for both the consumer and business markets, there is one other significant barrier in the way - the current investment in purchased and downloaded apps.
Currently there are 700,000 apps available from both Apple and Android. Some recent reports put the RIM apps count at just 105,000. They are working towards having many more by launch day, but 600,000 is a huge gap to fill and it will likely only get wider by the day. In fact, RIM is so concerned about this, they are actually guaranteeing developers a minimum of $10,000 per application they write (meeting some basic requirements). For smart phone users who have already spent money on apps for their current smart phone and have a list of favorite free apps, there will be some resistance to change - both having to repurchase favorites and just the time to find and download onto a new platform - assuming they can even find their favorites in the BlackBerry App World.
So can the BB10 beat rival makers Nokia (NOK), Samsung and Apple? Can the new BB10 operating system win over the Microsoft (MSFT) and Android operating systems? In my view, no, the train has left the station and left RIM on the platform.
RIM looks to have some short-term curiosity interest and makes for a nice trade for those quick on the keyboard. Any additional raises in price will put more pressure on the shorts and we could see some interesting upside action. But it will only be momentary. Long term, they are trying hard but have lost the lead and appear to only be offering nothing breakthrough in the next generation so their prospects are in decline. This could be one to follow the Wall Street adage "buy the rumor, sell the news" - trade this through December and then just before the BB10 is launched sell and step aside. And if you do play this one, make sure to set your stops at a level you are comfortable with - RIMM could make quick moves.
Additional disclosure: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is only my opinion based on personal research and offered for informational purposes. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any equity, do your own research and reach your own conclusion. Investing includes risks, including loss of principal.
Disclosure: I am long RIMM.
Additional disclosure: the long positions are PUTs