Research In Motion: Under Promising And Over Delivering?

Mar.11.12 | About: BlackBerry Ltd. (BBRY)

In the comments section of a recent article, a reader and I were discussing our thoughts on Research In Motion's (RIMM) next earnings. Some analysts such as Jefferies & Co. (JEF) have recently predicted that RIMM will miss its already low guidance for the 4th quarter of fiscal 2012. Dismal expectations are nothing new for RIMM. The commenter suggested that anything short of missing guidance would result in bullish momentum for the stock, because most people already have such low expectations. I had to agree, and it made me realize that the real underlying issue for RIMM is still shaky investor confidence in RIMM's management, and consequently its guidance.

While RIMM has made changes to its corporate structure, this upcoming earnings announcement (slated for March 29) will be the first for the new management to preside over. And if the stock price is expected to move up simply because it falls within the already low guidance, that implies that investors are happy just to know that guidance is trustworthy and accurate, even if gloomy. If the actual results miss guidance (on the low side), it would imply that either management under-estimated or under-stated expected declines. Either way, it would suggest that guidance and perhaps management is out of touch or worse, and inspires further decline in trust.

Thinking about this scenario reminded me of the axiom "under promise and over deliver". Countless other thriving companies seem to operate under this principle, with good reason. For a leading example, Apple (NASDAQ:AAPL) seems to consistently utilize this strategy, and the results are evidenced by its increases in share price. What it is really says about a company, is that they are conservative when it comes to estimating positive information (e.g. not over-estimating) and liberal when they estimate negative information. In more simple terms, they wait to count their chickens, until after the eggs have hatched. A fellow SA contributor Andy Zaky talks a little more about this concept in his article about AAPL. The end result of this strategy is that most of the surprises for investors tend to become pleasant ones.

Regarding RIMM, it begs the question: could it be setting up to under promise and over deliver? It could certainly be beneficial to any stakeholders, and RIMM has suffered from over-confidence over the past year (the amateur hour ads come to mind). My simple assertion is that RIMM is unfortunately not under promising and over delivering at this time. In many ways they are still just trying to deliver on previous over-promises as evidenced by their tablet reaching competence nearly a year late. There is not much if any evidence to suggest that they are using that strategy, aside from the gloomy guidance itself, which was published last November before the corporate structure was adjusted. So in terms of earnings, it would be surprising to see them beat guidance. But it would undoubtedly be a nice surprise, and even when earnings are depressed, investors do sometimes see that as a sign of hope, because at least they know that the information is accurate and therefore trustworthy going forward. Additionally they will likely provide more information on their recent acquisition and perhaps more detailed subscriber data, which could be a pleasant surprise.

So does this make it a buying or shorting opportunity? On the buy side, the actual evidence that RIMM will make a full recovery and be a good value play any time in the foreseeable future is small, albeit certainly possible in the dynamic tech industry. If it were to show signs of real recovery, the stock price will surely respond dramatically, although expecting it to reach its previous heights is very hopeful. On the short side, there may be an opportunity, but it is probably just as risky as going long. If RIMM misses guidance, it will be a major blow that only unmistakably positive data about subscriber base etc. could hope to stem. But at the same time, RIMM does not have much farther to fall, considering the context of the past couple of years. It may have already hit bottom, or it could fall further. And the more it falls, the more enticing it will appear to acquirers that would buy it for cheap intellectual property or to remove a competitor from the field. The only thing we know solidly for RIMM right now is that the uncertainty will continue until they show clear signs of momentum, one way or the other.

Disclosure: I am short RIMM.