Seeking Alpha
Long/short equity, contrarian, research analyst, portfolio strategy
Profile| Send Message|
( followers)  

Blackberry maker Research In Motion (RMM) has been one of the worst performing stocks this year. RIMM has fallen from over $70 in February to under $20 now. Some have argued that RIM is now "cheap." Are they right? Maybe, but cheap stocks tend to get cheaper. RIM trades at just 3.4 times earnings, and has over 3 dollars a share in cash. By traditional metrics, RIM seems to be a very cheap stock. However, we must remember that stocks get "very cheap" for a reason.

RIM is facing many significant headwinds, but the greatest is a complete lack of innovation. The smart phone business has become increasingly competitive, and RIM has not been keeping up with other players. Apple's I-Phone has clearly become the smart phone of choice. Just a few years ago, Blackberrys were the smart phone of choice.

Some argue that RIM still has a "loyal" base of die hard fans, but i find this hard to believe. I think what RIM really has is a large group of customers who are unhappy with their Blackberry and are simply waiting until their contract is up to purchase a better product such as the I-phone. As customers gradually switch from Blackberrys to other phones, RIM will lose much of its "loyal" base. For this reason, earnings will continue to go lower with time. So while RIM is trading at 3.4 times earnings now, in a year or two that number could actually jump to a number more like 7 or 8 times earnings.

Billionaire Leon Cooperman has recently disclosed a new position in RIM, but he seems to be lacking real conviction. Cooperman told CNBC, "It’s a small position and hopefully we’ll develop greater conviction after they come out with results in December. We’re hoping they’ve seen the worst." Cooperman is "hoping" that RIM has seen the worst, but I think without new and better products it is impossible that RIM has seen the worst.

Perhaps RIM is a buyout target for a larger company such as Microsoft (NASDAQ:MSFT), but this seems unlikely. For this reason, RIM is simply a sale and not a short sale.

The only hope RIM has at a turnaround is to innovate, something that has been painfully difficult for the company over the past few years. If RIM fails to innovate, I suspect RIM goes the way of Nokia (MOK), Motorola (NYSE:MMI), or Palm. This stock could easily reach single digits if RIMM continues on its current path.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Time To Sell RIM?