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Google's (NASDAQ:GOOG) Android is currently the leading smartphone platform in the world. In a very short time, the Android has captured more than 45% of the global market. This market domination has come at the cost of market players such as Symbian, Windows OS and iOs, among others. The Android platform took a blow recently, with its primary manufacturer losing a major infringement lawsuit against Apple (NASDAQ:AAPL). The dynamics of the industry will be affected by this outcome. The vulnerability of Google's Android to potential lawsuits by Apple has become a more material concern for manufacturers in the post-verdict world. Samsung (OTC:SSNLF) has made a hurried launch of its WP8 ATIV S phone, just days after the verdict came out. Although the phone was preplanned, the surprise launch might be the first pebble in what could possibly be a landslide. A weakened market leader is favorable to other players in the market. The Symbian is a dying platform, and the iOS is limited to Apple devices. Currently, Windows 8 and Blackberry 10 seem to be the likely replacements.

Even better news for stakeholders is Research in Motion's (RIMM) decision to license its software to other manufacturers. This makes for an interesting situation in the Smartphone Industry; the BB10 and WP8 will try to cash in on the possible Android fallout. Even more interestingly, both manufacturers will be following the same model of charging a licensing fee, unlike the free licensing of the Android. The licensing option, combined with possible marketing openings, increases the prospects of a RIMM turnaround. Moreover, as we have discussed earlier for Nokia (NOK), the verdict will also increase the potential value of RIMM patents, thus further increasing its value. Therefore, we are changing our rating to hold from short.

Figure : RIMM's 52-week price

Source: Y-charts

Since our last short rating for RIMM, the stock has lost approximately 5%. As can be seen in the graph above, the stock has lost approximately 80% of its value in a single year. Investors have become weary of a steady decline in sales, combined with the quarterly results that missed targets. The company is cash rich with the 2012 end cash balance being $1.5 billion. The current ratio stands at 2.06 and the quick ratio is 1.75; both better than the industry averages. We have already discussed how the continued decline in sales can affect fundamentals.

Blackberry 10 and Devices

There has been a positive response from critics to BB10 and its devices. The following are some standout features of the new OS, according to the information available:

  • A unified inbox would combine all the different notifications from email, text, BBM, and even call history, into one unified display. This will be ideal for users who have multiple channels of communication, and would totally eliminate the time spent switching between different interfaces.
  • Cascade is another interesting function, which allows maneuverability between different screens (much like the Windows OS and 'window' function). However, instead of minimizing a screen, as you would while using a PC, users only have to slide and adjust to view screens side-by-side.
  • The most interesting feature of BB10 thus far has been its full-touch screen QWERTY keyboard. CIO.com's analyst, Al Sacco, has done an early review of the keyboard, and this is how he describes the experience:

'…keyboard is fantastic, and even though I only spent a few minutes typing on it, I was impressed right away…..'

  • Another very interesting feature is the image time wrap option available to users. Users can alter different parts of an image to get the perfect picture.

It was recently reported that the company will be launching six new devices for its BB10 platform. The market already has some information about the Dev Alpha, which was given to developers as a BB10 prototype during the Orlando BB10 jam earlier this year. It is being rumored that these devices include touch screens, as well as the classical BB keypad devices. It is also being rumored that the new BB10 devices will have a 1.5GHz dual core processor. Reportedly, the devices will carry a Qualcomm Snapdragon S4 Pro MSM8960T. The BB10 is indeed interesting and will for sure woo blackberry fans. It remains to be seen if it can also attract customers away from the iOS and Android. There is still no comprehensive information about the WP8 and the devices that will run the OS. Therefore, we will have to reserve our judgment on the success of the BB10; however, the weakening position of the Android has surely given it an entry point.

Divest Strategy

We think BB10 has a fighting chance in a post-verdict world. The stock remains a high risk investment, and investors looking to exit their positions in RIMM should look for rallies. It is not possible to predict the exact date of such rallies; however, we can highlight events that can potentially rally the stock.

  1. The outcome of the September injunctions against Samsung can have a potentially positive impact on RIMM's price movement. Any decision against Samsung will potentially drive up RIMM's price.
  2. As we mentioned above, licensing agreements are key to a RIMM revival. Therefore, any news of a possible licensing agreement will drive the stock price upward.
  3. A successful WP8 launch will also have a positive impact. The launch of Nokia's WP8 devices is important in this regard. If the market invests in a Nokia turnaround, we can expect some positive movement to come RIMM's way.
  4. The stock rallied on the speculation of a Samsung acquisition of RIMM, and then speculation of a possible asset sale. We believe the company will not make any major asset sale until it evaluates its BB10's market performance. However, the stock will still show positive movement on any such speculation, giving a good opportunity for investors looking to divest.
  5. As the table below shows, the stock has a history of moving on earnings announcement. Therefore, we believe the earnings announcement will be a good opportunity for a rally in case analyst estimates are beaten. This, however, should only be used keeping in view other catalysts, which might impact the stock price.

Ann Date

Per

Per End

Reported

Estimate

%Surp

%Px Chg

P/E

12/20/2012

Q3 13

11/12

-0.385

09/27/2012

Q2 13

08/12

-0.439

06/28/2012

Q1 13

05/12

-0.37

-0.069

-436.23%

-19.06%

7.6x

03/29/2012

Q4 12

02/12

0.42

0.81

-1.23%

7.06%

4.63x

12/15/2011

Q3 12

11/11

0.51

1.212

4.79%

-11.17%

4.04x

09/15/2011

Q2 12

08/11

0.8

0.882

-9.30%

-18.99%

5.73x

06/16/2011

Q1 12

05/11

1.33

1.323

0.53%

-21.45%

6.77x

03/24/2011

Q4 11

02/11

1.78

1.754

1.48%

-11.23%

10.38x

12/17/2010

Q3 11

11/10

1.76

1.652

6.54%

-2.86%

10.53x

09/16/2010

Q2 11

08/10

1.46

1.356

7.67%

0.49%

8.22x

06/24/2010

Q1 11

05/10

1.38

1.34

2.99%

-10.84%

12.7x

Source: Bloomberg

Conclusion

We believe BB10 has a market entry point, assuming that the Android faces future legal issues. Moreover, the price of RIMM's patents should be reevaluated in light of the heavy fines that Samsung will be paying Apple. We will analyze the different valuations of these patents in greater depth in our next update on RIMM. We are changing our rating on RIMM to hold. We believe investors looking to short RIMM should do so on rallies.

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

Business relationship disclosure: The article has been written by Qineqt's Technology Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

Source: Should You Short RIM?