Today, Research in Motion (RIMM) warned that it is going to have an operating loss during the first quarter. The company has hired JPMorgan Chase (NYSE:JPM) and RBC to conduct a strategic view. Following this news, the stock lost 8% of its value in afterhours trading, pushing it to single digits.
The warning didn't surprise me at all. In an article published at Seeking Alpha on May 3, I predicted the following: "RIM will have two very ugly quarters and burn piles of cash."
Due to market expectations of an entirely new operating system, any potential customer left for RIM will put their purchase on hold until BB10 is released. We saw a similar phenomenon prior to the release of iPhone 4S, but RIM is no Apple. During these two quarters, RIM will have very ugly earnings records, and it will burn a big chunk of the limited cash it currently holds. In the meantime, those customers in waiting will have an enhanced probability of switching to a different operating system such as iOS or Android. Service is not the savior in this regard: Over the past year, 75% of RIM's revenue is from selling devices.
With the big three: Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT) having a dog fight in the extremely competitive smartphone market, a smaller player like RIM's only opportunity is a large pace of leapfrogging, that will require having something much better than the market leaders.
This industry is marked by high R&D cost and high product launch cost, both of which are fixed costs. Any company to succeed needs a market demand that is large enough, in order to dilute the fixed cost. Not enough consumers will switch to BB simply because it is "as good". It has to be better. BB10, at its best, shows us it can be an "as good" me-too product.
So what should RIM shareholders do facing the new reality?
One doesn't have to look far to see the outcome with Palm. Palm had a decent mobile OS in WebOS. Similar to RIM's situation, it was largely ignored by consumers. Its stock price was severely punished until HP (NYSE:HPQ) grabbed it $1.2 billion. After that, even HP couldn't save the system with the ill-fated launch of touchpad.
RIM holders should sell now. Extreme risk seekers may play the wishful acquisition game, but in this market, there is no longer any proper suitor left.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.