Weiren Ji's  Instablog

Today one chart from FT.com brought my attention. You can find the article at http://ftalphaville.ft.com/blog/2012/05/21/1008231/oh-so-now-its-a-5bn-loss/. Here I only paste the interesting chart used by the article.

This chart gives us the risk appetite for the big four. We can see JPM has highest portion of risky assets in its portfolio and BAC has the lowest portion among the banks. If you look at earning per share, it has the same order as the risk indication from this chart. Perhaps $3-$5 billion trading loss to JPM is considered small to its annual earning. We don't know how they are hedging their current risky portfolio. People suspect the short position for 2017 CDX.IG.9 exposure might reach $100 billion. Considering its long 2012 CDX.IG.9 and short 2017 CDX.IG.9, does JPM have any other long CDX to hedge its risky portfolio? Is it going to buy more IG in other series to offset this position since unwinding it is difficult? Does it need to prepare to reserve more capital if loss is widening?

Assuming big banks business models are similar, if future is good, the less risk appetite banks will take higher risk in their business, which will increase their earning. If future is bad, the high risk appetite bank will either write more loss or have to reduce its risky appetite which will reduce its earning. If the assumption is correct, long BAC and short JPM looks reasonable.

It has been a tough year for RIMM. It is losing market share to apple and android device makers. The user experience of its mobile devices lags to Apple and Android device with no doubt. Is it current price reasonable? I like to share my thoughts on RIMM. RIMM has a healthy financial condition. It is still generating positive free cash flow and no long term debt. Since corporate users are conservative to switch to other devices, it is able to continue generate positive free cash flow for more years if current situation does not worsen rapidly.

Opening its financial report, it has cash and investments $1.46 billion, accounts receivable $3.9 billion, PP&E 2.73 billion, and intangible assets 2.47 billion. If we break down the firm and sell all its assets, we mark down its A/R by 40%, other receivable by 20%, inventory by 70%, other current asset by 50%, PP&E by 40%, Licenses and Patents by 25%, other asset by 60% and goodwill by 100%. Its assets worth around $8.98 billion after these mark downs. Subtracting its $3.84 billion liabilities, it worth $9.82 per share. What is the chance that it could survive for the next two years and how long it can continue to generate positive cash flows? Given a pessimistic scenario, it could continue to generate positive cash flow for the next one and half years and positive net income for the next year without inflating its accounts receivable. To make the calculation simple, let's put $2 on the top of the $9.82. (You can make pro forma and re-estimate the mark-down asset value at the end of one year) To me, its stock price bottom line is around $11 - $12.

Let's look at the optimistic side of this firm.

1. The smart phone innovation speed is slowing down. Catching up will diminish the innovation differentiation.

2. Like LinkedIn coexisting with Facebook, RIMM is possible to be a LinkedIn in smart phone industry.

3. Blackberry device is still the majority corporations' first option. It still has competition advantage in corporation markets. Corporations have many restrictions. This limits the full entertainment features of Iphone and Andoid phones. This market is still at growing stage.

4. Corporations have invested in blackberry for many years. This is the most stickiness user group to blackberry.

5. The global market for smart phone is still growing, and the global business market is still growing.

Here are my views on how the firm needs to do:

1. Switch focus to corporate market and keep the dominant position in this market

Blackberry has already lost its battle in consumer market. Please don't give too high expectation on the Blackberry 10. However, it still has advantage for business user. If we look the social network firms, LinkedIn coexists well with Facebook. In technology world, things change very fast. RIMM should put full focus on corporate users. Talk with IT teams of the Fortune 500, find out what corporate need and keep improving its corporate solution and user experiences.

2. Provide mobile device solution to small firms

Small firms sometimes are lacking of IT resource. RIMM can leverage its experience and give these firms consultant on the mobile device and security solution. One step more, it can provide solutions for building effective IT infrastructure integrated with blackberry device/software/service.

3. Strength/keep its differentiate features such as long battery life in business world

One thing I dislike iphone is its short battery life. An active user has to charge it every day. Long battery life of blackberry device favors business user.

4. Move useful business benefit app to Blackberry platform

There are many business useful apps for iphone and android phone. RIMM should keep eye on the killer business apps and pay for the developers to design its blackberry version. It is also helpful to developing toolbox to facilitate developer convert their ios or android app to blackberry platform.