I last gave my long-case for Research In Motion (RIMM) back on August 24th. The stock was trading at about $7 per share, and today it stands at $14.04, a 100% gain a little under 6 months. Talk about returns, right? In my previous article, I was surprised to see that so many people actually agreed with me that betting on a turnaround actually wasn't crazy!
Sure, there were a few commenters that kept saying that the company's stock would continue its decline and eventually bottom out at $0, after having disappointed so many investors at the $10's, $20's, and $30's. However, at the $6-7 range, and with no debt, the risk reward profile favored the long trade. It was only a matter of time before the hype machine would start in on the imminent release of the BlackBerry 10 platform.
Further, the success of Nokia's (NOK) Lumia 920, and the extremely negative sentiment surrounding Apple (AAPL), has added some extra juice to the more speculative plays in the smartphone space. There are indications that even in a world with well-established ecosystems, new entrants have a chance to succeed. Software today is written to be portable, and the people writing the platforms are trying to make it easier and easier to bring developers over.
That being said, is it time to take profits on RIM or maybe even short it? Or is it the last call to hop on board before the train truly sets off for fortunes unknown? I believe that now is the time to take some - but not all - off the table. I also do not believe that shares of the firm are a particularly compelling buy at these levels.
Valuation Support Is Not As Compelling
At the $7/share level, RIM had 57% of its market capitalization in net-cash. At today's $14/share level, that is now only 29%. This is still significant, but no longer the absolute screaming buy that it was before. Further, while the company is still cash-flow positive, it still has not turned a profit over the last several quarters. However, RIM's a turnaround play, so speculators are more than willing to take a few to the chin in the near-term for the gold at the end of the rainbow.
The problem is, what's the upside? While the valuation metrics such as P/S and P/B (each less than 1) seem to indicate that the firm may be fundamentally undervalued even at these levels, I believe that these metrics are not particularly useful for a consumer electronics company. Even in modest volume, sales can be made to be quite high. However in a cutthroat industry such as smartphones, the focus is on profitability. Apple has gotten away with obscene margins in this space primarily due to brand equity and adept supply chain management. However, even the "giant" is suffering from margin compression as smartphones and tablets become commodity products, manufactured and sold by large companies with other sources of revenue such as Samsung (GM:SSNLF) and LG.
RIM Is Not Microsoft, A Double Edged Sword
It is clear that Google's (GOOG) Android will lead the charge for smartphone market share. It's free, it's established, and people generally really love it (although Apple-diehards insist that it is a virus-ridden copy of iOS). However, there is certainly room for #2 and #3 (although I would be very dubious of there being room for more than 3). Apple's iOS isn't going away, either, so that really leaves the race for #3 for the near future.
So where does that leave RIM? It can't afford to put in the hardware and software resources that Microsoft (MSFT) and the vendors do, but it does have the advantage of controlling its own hardware and software ecosystem while Microsoft will be relying on other phone vendors. This could translate into a slight gross margin advantage for RIM over, say, Nokia (but R&D expenses probably increase proportionally).
Apple was able to reshape the smartphone world from an underdog position, so it is certainly possible for RIM to really come out and disrupt the space even against the giants, but the probability is low. PC Magazine had the following to say about the BB10 device that it got to use,
Here's the final verdict. BlackBerry 10 is promising a new platform from a company that desperately needs something exciting to turn things around. But we'll need to look at a more complete version of BB10 before we're ready to proclaim it the game-changer RIM wants us to believe it is.
Nokia May Have Already Pulled Off What RIM Wants To
Another fly in RIM's soup is that Nokia may have already pulled off what RIM is trying to achieve. The Lumia 920 is a beautiful phone that runs Microsoft's Windows Phone 8. The device has been praised by reviewers, it has been selling well, it's competitively priced, and it is available today. RIM has nothing of note available for purchase today and the stock price has seen a wild upside move solely on speculation on the success of BB10 in a very crowded market.
Thanks to Nokia (along with HTC (OTC:HTCCY) and Samsung, to lesser degrees), Microsoft is already well on its way to nabbing significant smartphone market share. It is unclear how much of a dent RIM will be able to make in this space, although anything is always possible.
Conclusion - Take Some Profits
Take profits on RIM. It has had an amazing run, and the time to sell is when everyone else is buying. When BB10 is released, we will probably see a fairly marked selloff in the stock, as everyone who had been buying in anticipation of the new release will be hoping to sell their shares on the news, in line with the old saying, "buy the rumor, sell the news".
Do I think RIM is a good short? Nope. The turnaround play could really work out. That's why I would not recommend exiting the entirety of your position in RIM if you were fortunate enough to get on board early on in this run. But if you can, play with the house's money.