Research In Motion: Hope Is Not A Strategy

Jun.29.12 | About: BlackBerry Ltd. (BBRY)

Take a look at Research In Motion's (RIMM) earnings report. Revenues fell almost 43% from last year's. They fell 33% from the previous quarter. Worse still, BB10 was delayed yet again, now toward Q1 2013. RIMM was already a binary option, with the odds stacked against it, even before all of this took place.

So, if you are holding this stock, why are you holding it? Because you bought it higher? Because you hope it will turn around somehow?

Hope is not a strategy. If and when you are facing this kind of disgrace, either there's something that can rationally and objectively make you believe things will turn around in a reasonable timeframe, or you need to find the guts to sell out of the situation. RIMM going under is not entirely unlikely right now, and you don't want to be one of the people who will hold the stock all the way down into that.

Can RIMM recover? Yes, that could happen somehow. But it's not predictable. And again, hope is not a strategy. If you want to win in the markets, you need a strategy. You need to stack the odds in your favor. You need an edge.

So again, why are you holding RIMM here? Why are you perhaps even averaging down here? Because Cramer told you to buy it at $100 and you've been holding ever since?

The fact that your loss came from holding RIMM does not mean you have to recover the money in RIMM. Indeed, it might even be impossible to recover it in RIMM. Sure enough, for many the losses are now so massive that it's 10 times harder to recognize the mistake and just let the stock go. But it's important to learn from this. What happened this week has happened countless times before. The motives for holding or buying RIMM have been few and far between for months, quarters, years.

What's needed here is a strategy. And hope isn't one. Every investment needs a motive to be undertaken. A thesis. And the thesis needs to be falsifiable, so you know when to get out, no matter if losing or making money.

So if you're going to hold or buy RIMM, what's your thesis? If you haven't got one, then perhaps it's time to move on. And by the way, "it's too cheap" can't even be a thesis here. "it's too cheap" can be used in situations where you expect stable or improving fundamentals over time. There is no such certainty (or even likelihood) here, at this point.

Other details in this quarter

Although RIMM still claims positive operating cash flow ($710 million in the quarter), this is greatly helped by changes in working capital ($395 million in the quarter) related to the reduced activity. It's also somewhat weird that accounts receivable fell just 16.7% from the previous quarter with revenues falling 33%, this can mean that there was some channel stuffing at the EOQ (end of quarter) even with these ugly numbers (the alternative would be an incredible implosion at the start of the quarter, followed by some recovery into quarter-end).

The main problem

I have already said this - that the numbers on RIMM mean little at this point. It's the trajectory, the very strategy and existence of RIMM, that's at stake. As it stands, the trajectory basically guarantees worse numbers as time goes by, and any valuation work done on the numbers RIMM is producing at this point, to come up with a "value" for the stock, is hopelessly obsolete as soon as a little time goes by.

RIMM is close to start burning cash. And it doesn't have a whole lot of cash to burn, either ($2.25 billion according to the earnings report). So if this trajectory isn't altered - and there is no reason whatsoever right now for us to believe that it will be altered - the ground will get closer and closer until RIMM hits it. We should have no doubt, a future product that nobody has seen yet - BB10 - cannot be held as a reason to believe things will turn out alright. That is basically hope at work (even if, later, the product really turns out to turn the situation around - miracles do happen, you just don't invest in them beforehand).

Post Scriptum

Want to hear something positive on RIMM? I'll put forward the only positive thing I found in its earnings report. RIMM claims the subscriber base is still growing, in spite of the huge plunge in revenues.

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