Research in Motion (RIMM) stock has sharply rebounded off a 52-week nadir at $6.12, established September 25, 2012, to close out the latest January 16 trading session at $14.50. This strong move calculates out to a 137% return that arrives largely in anticipation of the BlackBerry 10 release, set for January 30. Wall Street now appraises Research in Motion at $8.3 billion worth of market capitalization, despite the fact that this business is posting $744 million in losses throughout the nine months ended December 1, 2012.
Bears, including Keshav Rajendran of the Motley Fool argue that the BlackBerry 10 launch is doomed to failure. Therefore, Rajendran suggests that traders should short stock, prior to the "slow death of RIM." A thorough review of Research in Motion financials, however, indicates that a short position is a far too dangerous proposition for conservative investors. RIM is primed for a short squeeze.
The Mechanics of a Short Sale
When investors short a stock, they borrow shares from other investors and immediately sell that position for cash. At a later date, the short seller will "buy to cover," or re-enter the market to purchase stock and pay off the original loan. The short position is therefore profitable amid share price declines. The series of short sale transactions are inherently risky, due to the fact that stock prices can range between zero and infinity. Short sellers must also bank upon the legitimacy of modern portfolio theory and its central tenet of efficient asset prices. Celebrated economist John Meynard Keynes, however, famously proclaimed that, "the market can stay irrational far longer than you can stay solvent."
Recent trading activity in Research in Motion itself may disprove modern portfolio theory. RIM stock, and hence, its market alleged business valuation, have more than doubled over the course of three months. Throughout the past year, Research in Motion stock has remained a target for short sellers angling for severe drops in price. As of December 31, 2012, Yahoo Finance reports that short positions accounted for 137 million out of 515 million RIM shares outstanding on that date. Short interest has actually increased amid the latest run-up in Research in Motion stock. At the end of last November, only 120 million shares were short. Wall Street is now effectively positioning itself to profit off of a complete disaster at Waterloo.
Blackberry 10 and the Smartphone Market
On January 3, research firm comScore released its report for November 2012 on U.S. mobile subscriber market share. The report confirms just how far the once mighty Research in Motion has fallen from its 2008 heyday. In early 2008, RIM controlled nearly half of the U.S. smartphone market. Today, Research in Motion BlackBerry, Nokia (NOK) Symbian, and Microsoft (MSFT) Windows operating systems all operate in the shadows of a dominant Google (GOOG) Android - Apple (AAPL) iOS duopoly. Taken together, the Android and iOS operating systems now dominate 89% of the smartphone market. By the end of the September 2012 to November 2012 period, the smartphone duopoly actually increased market share by a near combined 2% above the prior quarter.
At the bottom of the heap, Research in Motion is left to defend and build out upon a meager 7% plot of the grand smartphone estate. On the surface, RIM directly competes against Nokia to offer a third alternative to the Google - Samsung (SSNLF.PK) - Apple matrix. On January 10, Nokia shares advanced by 18% to close out the session at $4.45, upon news that Nokia sold 4.4 million Lumia phones during its fiscal fourth quarter. With rapper Nicki Minaj serving as a primary spokesperson, Nokia executives are pitching the Lumia as a fun phone, and targeting the very same popular culture set that notoriously fawns over the Apple iOS and Google Android platforms. Research in Motion executives, however, built their original empire upon the goodwill of IT professionals and technocrats.
According to The Verge writer Jessie Hicks, Research in Motion primarily functions as an electrical engineering company, rather than a consumer electronics brand. As such, the BlackBerry 10 will offer upgrades in the security and networking features that are known staples of the RIM portfolio. Because expectations are minimal, RIM shares will perform well if just half of its 79 million current subscribers simply accept and migrate towards the new BlackBerry 10 platform. In terms of growth prospects, Research in Motion rainmakers recently inked a deal with Visa (V) that will effectively transform BlackBerry 10 phones into a mobile wallet. RIM, with its reputation for security, can emerge as a major player in the near-field communications market.
The Bottom Line
Research in Motion short sellers must recognize the possibility that this company could very well "float the note" for the next eighteen months and survive through financial engineering, irrespective of BlackBerry 10 sales performance. On December 20, 2012, Research in Motion released its third quarterly report for fiscal 2013. For the nine months ended December 1, 2012, RIM posted $744 million in net losses on $8.4 billion in revenue. The prior year, this company had turned a $1.3 billion net profit on $14.2 billion revenue.
Research in Motion closed out its Q3 2013 with $9.5 billion in tangible assets, on top of $3.3 billion in total liabilities. Research in Motion now carries $6.2 billion in tangible book value, while the business trades for $8.3 billion in market capitalization on Wall Street. On paper, Research in Motion stock remains undervalued, after adding a reported $3.1 billion worth of intangible assets to the equation. According to this snapshot balance sheet, RIM shares would reach fair value at $17.75 ($9.3 billion book value / 524 million shares outstanding).
Research in Motion bulls, however, should consider the advertising costs related to the BlackBerry 10 launch alongside intellectual property write downs that will subtract away from book value. Last May, Google closed out a $12.5 billion acquisition of Motorola, largely for access to patents. That summer, a California jury ordered Samsung to pay $1.05 billion in damages to Apple on patent infringement charges. According to Therese Poletti and Market Watch, these two events mark the apex of the smartphone patent bubble. Earlier this month, the Federal Trade Commission ordered Google to grant competitors access to hundreds of its own patents "on fair, reasonable, and nondiscriminatory terms."
RIM shares now effectively trade at fair value, after writing down intangible assets to $1 billion and subtracting out an additional $300 million in net cash position on selling, marketing, and administration costs related to the looming BlackBerry 10 launch. Still, short sellers can easily get caught in a squeeze on any stock with such a small float. Research in Motion stock could very well spike to $18, where it has technical resistance, by the end of this month. After an uneventful BlackBerry 10 launch, however, RIM shares may decline back towards the $12 support level by the end of this calendar quarter.
Over the short term, the stock market is not a rational pricing mechanism.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.