RIMM: In Motion for Share Price Collapse

RIMM's preliminary late night earnings report was a bombshell the longs could certainly have done without. The report was dismal to say the least, and featured a startling warning of third quarter results. Earnings guidance was ratcheted down about 15%, from previous estimates, ranging from 89 cents to 97 cents to between 81 cents and 83 cents. Revenue targets were also slashed from $3.1 billion to $2.78 billion. RIMM's poor relative strength (the shares were down more than 6% despite the nasdaq gaining 3.5%) yesterday clued me into the fact that all was not right with this company.

Sequential drop in gross margin: The blackberry producer delivered an impressive 50.7% gross profit margin in its second quarter, but third quarter gross margin could drop as much as 570 basis points to the 45% area as the company cut its guidance from 47% to a range of 45% to 46%. The company blamed the downfall on a stronger US dollar and lower shipments of existing products, due to general economic weakness. RIMM was able to sign up 2.6 million new subscribers for the quarter, but was woefully short of its expectations of 2.9 million new customers.

Deutsche Bank piles on: The analysts at Deutsche Bank think RIMM's disappointing results could also be blamed on poor reception of its new products (Storm and Bold). They contend the company's latest gadgets have been subject to weak demand due to numerous flaws, and both products essentially have the same functionality as previous products.

Bottom fishing: Don't try and catch a falling knife as RIMM could easily fall another 45% to the $20 area. If you look at RIMM's five year chart (to the right), you will notice strong support in this vicinity, as the shares traded in this range for more than a year. If the shares crater into the low $20 area, I would certainly be inclined to cover my short position and switch aggressively to the long side.

Bottom line: Although the shares have dropped more than 75% form their 52-week highs, more downside is in the cards. The trend is your friend and you might as well capitalize on this downside momentum by jumping on the short side. My July 29th article stressed RIMM was a good short, and despite falling more than $80 since then, RIMM presents an even better shorting opportunity today, as I would not be surprised to see the shares plummet all the way down to the $20 mark.

Disclosure: short

Comments

[Network Effect:]

Does anyone need any more evidence that Apple is crushing it?

2008 Dec 03 10:04 AM

[Buffeted:]

Based on last quarter's results, macro econ, other gadget data, reviews of the storm and preliminary black friday numbers from amazon et all, I dont see how anyone would be long on rimm even at 25.00.
I wont be surprised when the numbers for the present Q come in lower than those given last nite.

2008 Dec 03 10:05 AM

[Jon T:]

RIM could easily be a target for Microsoft at these prices....

After all, Windows Mobile is now officially lumped with Palm (in the toilet).

2008 Dec 03 10:57 AM

[.crazylegs..:]

Are you joking? They will still put up $3 of earnings and have over $2B cash. They still will grow at 60% even with these lowered numbers. The shorts have made their money - the stock being up today might be an indication that the stock is completely washed out. In this environment, any company that lowers estimates gets killed. Why not here? It's already priced in.

2008 Dec 03 11:14 AM

[well:]

what a douche bag- encouraging people to short and bash to stock to 20.00 ,,its these players that have been killing the market,, ... a company is having rough time like all companies dosnt mean it deserves to have its shares plumet like its going out of business... with a popular phone in demand and revenues coming in, i dont see a good company like rimm at 20 unless something is really really wrong

2008 Dec 03 12:19 PM

[Sirvasq:]

The short crowd has got to move on to greener pastures. Not one comment on the obvious brilliant move by management, to reassure shareholders that the quarter was very salvageable, when compared to PALM's 30 percent miss, even without contribution from delayed Storm product, which will fly off the shelves starting Monday. .81 in the quarter, with growth shows at worst, the stock is a 10 PE with great growth prospects and a guarantee of locking the business market and sharing top 2 survivor spots with AAPL. The price bouncing UP shows even the bears are scared.

2008 Dec 03 12:20 PM

[well:]

rimm has certainly collpased , i mean from 140 down to 35 while appl is only down 50% due to the environment, this is unaccetable and a bad gamble i feel bad for the long term investor as its a huge pain. but even with that said you still cannot compare rim with lg NOK mot, or palm. these players are simply vendors of dumb phones they mass produce cell phones and pump the market full of them but thats it. rimm is worth more as it provides technilcal support, generates revenue off subscriptions, has it's own secure data center, business /government is its bread and butter and they will continue to use it. even though when it comes to the touch screen people will go for the iphone rim still has an alternative, and for all who dont like the touch screen the bold is excellent and with time the bugs in the storm will be fixed and im sure newer version will come out. and once we're out of this recession and business picks up things will look up for rimm. and even the misses rim had were nothing compared to palms, they're not going out of business their product is in demand, and it's good they let this news out upfront before dec18 so the same thing dosnt happen as last time. in short, i dont see rimm at 20.00 it's worth more, we'll have to wait for dec18 but for long term player will have to keep on holding

2008 Dec 03 09:36 PM