I have been bearish on Research In Motion (RIMM) for several months now. I first wrote about Research In Motion in September and have been short since then. I have taken profits on most of my position but I still have a small short position left.
My most recent article, Research In Motion: HTC Is A Sign That The Knife Will Keep On Falling, detailed how I was predicting Research In Motion to miss earnings and guide lower. Just 7 days after this article Research In Motion came out and said, "Research In Motion no longer expects to meet its full-year earnings forecast of $5.25 to $6 per share because of weaker than expected smartphone shipments, a $360 million after-tax writedown on PlayBook inventories and a $50 million charge related to the October outage."
In this article I will give my thoughts on new questions investors have regarding Research In Motion as well as give insight on how I predicted the earnings shortfall. It's important that investors learn to dig through the corporate propaganda and find the truth that companies often try to hide.
Let's take a look at some investor concerns to gather more information about the company's future.
- The new Playbook promotion will boost sales and reduce inventory - It amazes me how Research In Motion continues to mislead investors on the company's direction and intentions. Yes, I do believe that the new promotion will greatly reduce inventory and increase sales but all for the wrong reasons. I expect Research In Motion to take a loss on this promotion and is just trying to reduce inventory of a failed product. Don't expect this to help the bottom line.
- Research In Motion is a takeover target - Yes, I do understand that Research In Motion is trading below book value and that its assets may be worth more than its market cap. Getting a buyout done in the current climate may not be as easy as you may think. Any suitor would have to please Canada in order to get government approval. This would make it difficult for private equity or foreign manufacturers who will most likely trim down operations and relocate workers. I estimate the probability of a buyout of the whole company at around 20%.
- Research In Motion should change its chief executives and consider a break-up - Research In Motion currently has an activist shareholder that is trying to shake up the executive seat as well as break-up the company. The activist investor claims to have 8% of shareholders backing the plan. It's going to be difficult to get this plan to pass. Many activist investors have been having difficulty persuading investors to back their plans. Carl Ichan is an example of an activist investor that has run into tough times. A majority of his investments have remained independent and have resulted in an average loss of 60%. Many activist investors often look for short term gains by breaking-up or selling the company. This strategy doesn't sit well with many large investment funds that take a longer term view.
In regards to my Research In Motion earnings prediction, there were several factors that caused me to remain bearish on RIMM. The first issue I had with the company was the direction of the company overall. The company missed the mark and failed to redesign its products to match customer needs. I have a bit of an edge here because I own several wireless retail stores and I'm familiar with the industry. An investor could get the same edge by closely following an industry and getting to know the details about the business. This will allow investors to closely monitor trends as well as get to know the major players in the industry.
In the last earnings report [see transcript], Research In Motion believed that the Playbook and its new line of Blackberry 7 devices would get the company back on track during the holiday season. I was able to tell that by monitoring retail sales in my stores that Blackberry phones were being out sold by a very large margin. Monitoring retail sales often gives you an idea about the consumer response to various products. Many consumers passed on Research In Motion's new devices and instead opted for a Samsung Galaxy S2 or an Apple (AAPL) iPhone 4S.
I got further confirmation about my bias when HTC lowered guidance for the year. Monitoring major competitors often gives you an idea about how other companies in the same industry may perform. For example, if Lowe's (LOW) were to beat earnings because of stronger than expected consumer shopping, you could expect that Home Depot (HD) would have a high chance of beating earnings as well. In this case HTC has guided lower due to competition from Apple and Samsung. I expected Research In Motion to be negatively impacted based off my research from monitoring sales.
Another big issue I had was how many analysts seemed to believe that the outage would not hurt Research In Motion's business. As soon as Blackberry started giving $100 in free applications away to millions of customers I knew that the company would be taking a hefty loss from the outage. This was almost the same type of propaganda that occurred in Netflix (NFLX) when the company was telling investors that it wasn't expecting to lose many customers to the price hike.
I continue to remain bearish on Research In Motion and expect the company to struggle until the launch of its new QNX devices. These devices are a big key to the company's turnaround and will decide if the company will be able to get back on track. I will continue to ride the rest of my short position until I see signs of a turnaround.