Research in Motion (RIMM) announced fourth quarter 2011 earnings at the end of March that failed to meet even diminished analyst expectations. The company has been in a deep downward spiral for at least two years as it faces intense competition from innovative rivals such as Apple (AAPL), Google (GOOG), and Microsoft (MSFT).
The once ubiquitous devices have now fallen out of favor with mainstream consumers and are rapidly losing support among corporate clients. If RIMM raised the white flag in December, this quarter is RIMM's swansong. The stock recently touched a new 52 week low after having tumbled over 17 percent in the last quarter and I am betting that it can fall further.
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I will reiterate what I said in November when I predicted that RIMM could fail in 2012: "I am going to stand firm and say that you cannot invest in Research in Motion besides speculating on it being a takeover target." Below I will present four reasons why I still believe Research in Motion will fail this year.
The Company Is Abandoning The Growth Story:
In comments released after the quarterly earnings, RIMM alluded to retargeting its core corporate users and only providing attention to "targeted consumer segments." With the advent of corporate 'bring your own device' policies at more and more employers this is a misguided strategy for Research in Motion. It has already been shown that employees are more than willing to shell out their own money for higher quality devices that they prefer. It is quite a strong statement when people are saying that they would pay money to NOT use your product; this is exactly what is happening with Blackberries. The only way to compete against the likes of Apple and Google is to make innovative devices that end-users enjoy. Only then will those consumers bring the devices to work and shift the opinions of the influencers. Unfortunately for RIMM I do not believe that there is enough time to break free from the entrenched strategy and produce breakthrough devices.
Information Week surveyed over 500 information technology employees and found that a staggering 99% responded that either "RIM is a former leader whose best days are behind it" or "RIM's strong, but losing influence." Information Week politely summarizes the survey "Is RIM losing steam?" but I think a more appropriate synopsis would by "Does RIM have a chance?"
Key Executives Departing The Sinking Ship
In the last two weeks the following executives have left the company:
- Senior Vice President Alan Brenner
- Vice President of Blackberry Messenger (BBM) Alistair Mitchell
- Former Co-CEO and Chairman Jim Balsillie
- CTO David Yach
- Global COO Jim Rowan
Can you really blame these executives for leaving before the company completely implodes? While it is noble to try and resurrect a once great company it is time to be realistic on RIMM's prospects. The best case scenario is a strategic acquisition in which the patents and security strengths are harvested while most of the company is razed. If you believe insider selling is a signal to sell a stock (open for debate), insiders quitting at a rapid pace is a strong indication that the corporation is going in the wrong direction.
Writedowns on Major Products
In the most recent quarter the company took a $125 million writedown on Blackberry 7 units. This comes on the heels of the $485 million writedown on the Playbook tablet after the company was forced to deeply discount it just to push sales. Writedowns occur when a management believes its assets have been impaired in someway and the expected return on those assets will not materialize. Essentially it is an attempt to conservatively state financial position and to record a loss now rather than in the future. Writedowns are not uncommon for technology companies but it is very alarming when a company is forced to writedown brand new products because sales are slow. To make matters worse, Peter Misek at Jefferies believes more writedowns will be necessary next quarter. In contrast, Apple is having a hard time keeping its new iPad on the shelves because it is selling so quickly. Which company would you rather own?
Suspension of Guidance
There are legitimate reasons why companies will suspend issuing detailed guidance such as a volatile macroeconomy but I typically view this is a strong warning sign of future performance. RIMM said that it suspended guidance because the company will face "continued pressure on revenue and earnings throughout the next year." To read between the lines, the company is unwilling to make predictions about future revenues/earnings because sales will slip far past their ability to estimate. Investopedia has a nice summary on the effects of suspending guidance. It cites the positive that investors could forgo their short-term mindset but that is quite unlikely in such a fast moving industry. The negatives of increased volatility and a further loss in confidence far outweigh any potential benefits in my mind.
How to Play It
I recommend avoiding this stock completely. If you are long I suggest selling to avoid any future losses. I just presented the short case once again for this company but you need to remember that just one unfounded rumor of a takeover and the stock could surge five percent overnight. The possibility of a "black swan" event means that you effectively cannot short the stock but does not make longer term put purchasing out of the question. Throughout the years I have profitably ridden RIMM long and short but have completely avoided direct investments for the last six months at least. Despite the compelling reasons to short the stock, I recommend staying on the sidelines and watching this one as it unfolds.
Disclosure: Author is long AAPL and GOOG; short AAPL Apr 13 630 Puts.