Research in Motion (RIMM) is a designer and producer of wireless solutions for the worldwide communications market. RIM was at one time the market leader in the smartphone market, but the company has since severely struggled to maintain its competitive advantage over other smartphone providers. According to Gartner, RIM reached its peak market share in 2009, having almost 20% of market share in the smartphone space. Recently Apple and Samsung have well surpassed RIM and Morningstar projects that RIM market share will have fallen to 5% at the end of 2012. Currently, the company's future rests on the Blackberry 10 OS. I recently wrote an article highlighting 3 stocks that were potentially good shorts for 2013 and RIM was one of them. Many people disagreed strongly with this pick and in this article I hope to expand my position on RIM.
The Bull Case for RIM:
- - Early reports on the BB10 indicate that it is going to be a great phone
- - The stock is heavily shorted with 32% of shares being shorted. Shorts will be forced to cover, further driving the stock price up.
- - RIM's subscriber base has risen and the company has strong customer loyalty, which will only help BB10 sales.
- - 62% of cars shipped with an infotainment systems run QNX which is essentially BB10.
I personally believe that the bull case is weaker than the bear case
The Bear case for RIM
- - The product delays with BB10 may prove harmful, making it too little, too late.
- - After BB10, RIM has much fewer options if it needs a positive catalyst
- - The company has made an "all-in" bet on the BB10 operating system and if it fails, so will the company.
- - Analysts still believe that the company will loose money in 2013 and 2014
Blackberry 10 OS
On January 30, RIM will launch the BB10 operating system along with two new phones, the Blackberry Z10 and the Blackberry X10. One model will have the traditional QWERTY keyboard and will most likely come to market several weeks after the Z10. The Blackberry Z10 is the flagship phone and there are reports that it could price below the $199 industry standard, potentially at $149 with a 2 year contract. One important thing to note is that the BB10 is an operating system, not just one particular phone. This is both a negative and a positive for the company. As a positive, the company is rumored to have four additional products but nothing is official.
If the BB10 is a huge success then these four additional products could help turn around the company. But RIM has had trouble getting products to market and has had numerous delays and setbacks getting the BB10 out. Negatively, if the BB10 is a big failure, then RIM has put all its eggs in the BB10 operating systems basket. If the reaction is negative to the OS then those 4 rumored additional products would not be very likely to see the market if their attraction was based on the OS. Of course if these potential products are very far along they will definitely see the market, but if BB10 if a flop then their impact will be very minimal.
Although the past year has been rough for RIM it has a pretty good financial position. As of August 2012 they had $2.3 billion in cash and most importantly no debt. If the BB10 is a flop the company will have a solid cash position to fall back on.
RIM stock is up over 150% over the past 6 months. This has been partly due to hopes that the BB10 OS can help turn the company around, but also several analysts have come out in support of the company recently. In my opinion taking any position in this company before we know more about the phone is risky. However, I do believe that RIM's long term prospects are poor as a BB10 failure would be catastrophic.
On the other, hand if BB10 is a success, it is unclear how long the BB10 OS will be able sustain RIM. Right now I believe that the stock is trading significantly higher than it will be one year from now, however, both shorting and going long the stock right now are risky. If early sentiment on the phone is very positive, then shorts could very well cover, sending the price significantly higher in the short run. Combine this with a very real possibility that the BB10 will be a good platform and be able to attract people from the iPhone and Samsung products and you get a much higher stock price.
The risk with going long the stock, is that BB10 gets very negative early reviews and does not sell well, if this is the case then I believe the stock will head back down. I personally do not believe that the Blackberry 10 will be able to turn around prospects for this struggling company, but shorting the stock is also a risky proposition as the possibility of shorts covering could alone send the stock higher. If I owned shares of RIM I would sell into this rally, but would also wait until we have more clarity on how the public will receive the BB10 before shorting the stock.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in RIMM over the next 72 hours.