The share price of Research in Motion (RIMM) continues to dip amid investor uncertainty about the company's future. RIMM's fundamentals are deteriorating, and it continues to burn cash. If things remain the same, the company will soon have to look for new debt financing sources. Given the current turmoil it is facing, inevitable unfavorable lending rates will only mount pressure on the struggling smartphone manufacturer. The continued delay of the Blackberry 10 OS is becoming an issue of concern for investors. The stock price has fallen over 70% since last year, and a turnaround based on the BB 10 platform seems unlikely at best. Therefore, we recommend investors to short the stock on rallies.
The stock price has depreciated approximately 70% to $7.56 in the last one year, with its 52-week high being $33.54. The company's decline started last year when 1Q2011 results dropped after 9 years. Apple Inc. (AAPL) and Google (GOOG) have attracted significant BB customers towards their superior platforms. The company missed expectations last quarter by posting EPS of -0.99, while analysts were expecting EPS of -0.06. Mobile shipments and revenues both dropped approximately 40% to 7.8 million and $2.8 billion respectively.
The company reported that it had lost 12% customers YOY in the U.S., which resulted in a 21% decrease in revenues from the region. If we look at revenue sources, international revenues have increased as a percentage of total revenues from 42% to 60%. As can be seen from the graph, the biggest decline has been in percentage sales from the U.S., and the smallest change has been in Canadian sales.
Following are some key developments since our last update on Research in Motion:
- The company announced that it would launch its newer version of the Playbook in Canada; it has several features, like email, which the older version lacked.
- RIMM has announced that it is trying to sell off NewBay; it recently purchased the company for $100 million last year.
- A significant update this week was International Business Machines' (IBM) informal offer to buy RIMM's enterprise division. Research in Motion had already disclosed that it was looking for possible buyers for the entire, or parts of its business. This division operates servers that run BB messaging and email services. No details of this offer have yet been released by IBM, which had approximately $11 billion cash balance at the end of last quarter. RIMM's market cap is $29 billion to date.
- Eastman Kodak (EKDKQ.PK) lost the lawsuit that it had filed against RIMM and AAPL for copyright infringements of its 'Digital Image Preview' technology. The troubled photography giant was hoping to resolve its current cash problems through a possible $1 billion settlement.
- Mformation won its case against RIMM, which will result in a settlement of $147.2 million.
- Last week, the company's shares jumped after an influential analyst (Jefferies & Co's Peter Misek) reported that RIMM and Samsung were looking for a possible partnership. The nature of this partnership would be the adoption of the BB 10 platform by Samsung phones. This news increased the share value by approximately 5%.
- Canadian Investor Prem Wasta increased his investments in RIMM. Fairfax Financials, an insurance company run by Prem Wasta, is now a 10% holder of RIMM s stock. Fairfax has no interest in pushing for a sale, and instead looks at RIMM as a long term investment.
The company is burning cash, but the fundamentals for the time being are not that far off from industry averages. However, we must take into account the continued bad performance for the next six months and the effect it can have on company fundamentals. The following are some key fundamentals for RIMM as compared to industry averages:
Cash Cycle (Days)
The quick ratio is 1.75, which is below the industry average, but is still healthy. The current ratio and Assets/Equity ratio are both below the industry average, but are also healthy. Fundamentals can deteriorate further if sales and margins do not pick up in the next few quarters. The company will have to borrow cash from the debt market to sustain its cash burn. Things, as they stand for RIMM, do not present a positive outlook, which is why the company will have to borrow on very high rates, increasing its troubles further.
The graph below gives a good representation of the future cash requirements of the company. The net of operating and investing is negative.
Analyst opinions about the company have deteriorated over the last one year. For the past three months, the dominant analyst opinion had been to hold the stock. However, the stock price has depreciated by over 30% in the last three months. The market still wishes for a miracle from the former smartphone giant, which seems to be more and more unlikely every day. This can also be seen by a shift in analyst opinions; 18 analysts are giving a sell recommendation for RIMM, as compared to 12 analysts a month ago. In the last month, the number of holds has decreased by 9. Number of buys has also increased in the last month. This increase can most likely be attributed to takeover and acquisition speculation.
In our opinion, RIMM will remain troubled for the foreseeable future. The company is looking towards its BB 10 platform to turnaround its fortunes. It remains doubtful as to whether, in the presence of Andriod, iOS and the upcoming Windows 8, the new OS from RIMM would be a huge success. A key problem with BB is attracting new consumers away from its competitors. It remains to be seen if BB 10 can accomplish this difficult task. While the company's financials remain strong, its real problems stem from its sales and margins. If these problems do not go away soon, the financials will also deteriorate within the year. The stock has been moving on acquisition speculation for over a year, and still no substantial development has been made in this regard. RIMM's management would most likely not make a big change in terms of asset sales before they evaluate the BB 10's success. We maintain a sell recommendation based on the aforementioned reasoning.