Why are Some Hedge Funds Bullish on This Struggling Tech Stock?
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Research In Motion Limited (NASDAQ: BBRY) is best known for its BlackBerry device, which has been under siege for the past year as a number of other smartphones have flooded the market. This is troubling—BlackBerry accounts for almost 60% of RIMM’s total revenues. RIMM does continue to boast almost 78 million subscribers, but volume growth is in steep decline, with unit sales projected to decline 30% next year.
As RIMM’s BlackBerry becomes more uncompetitive, the company’s road to recovery gets even tougher. Support for the stock—which is down over 50% year to date—appears to be driven by a possible takeover or break-up of the company. EPS estimates show a bleak outlook, with a recovery taking years at best. Analysts estimate 2012 fiscal earnings will come in at negative $1.51, down 136% from last year, and 2013 to come in at negative $0.62.
Once owning over 20% of the smartphone market in 2009, RIMM now appears to be struggling to stay relevant. The smartphone market has grown 58% over the last five years and changed greatly over this time. RIMM now only owns 9.5% of the smartphone market, with Google Inc (NASDAQ: GOOG) owning the market with 52% market share. Apple Inc (NASDAQ: AAPL) comes in at second with 33%, and Nokia Corporation (NYSE: NOK) with only a 3% share.
One of the company’s fast growing competitors, Apple, touting the iPhone as its only mobile device, recorded 3Q revenue of $35 billion, up 23% year over year, and full year revenue is expected to be up 50% from 2011. Apple just launched its new iPhone 5 and is expected to sell 25 million iPhones this quarter, which includes 8-9 million iPhone 5 units. Compare this quarter’s iPhone unit sales projections of 25 million to BlackBerry’s full-year volume estimates of 27 million, and it is easy to see why RIMM has lost over 70% of its share value in less than a year.
Google, the current leader in smartphone market share, is looking to continue its attack on the mobile market—ramping up spending to spur innovation in mobile by hiring 1,200 new employees in the second quarter and adding another 20,300 with the Motorola acquisition. The adoption of Google’s Android mobile operating system continues to be impressive, with 1 million Android handsets activated daily. Google continues to report strong results, posting second quarter revenues up 35% from last year, excluding Motorola revenues.
Nokia is another company trying to stay relevant in the smartphone market. The company introduced its new Lumia phone earlier this year. The Lumia phone series runs the Windows Phone 8 operating system created by Microsoft Corporation (NASDAQ: MSFT). Nokia went through a steep decline of its own back in 2008 similar to RIMM’s recent slide. Nokia continues to struggle today—the company saw a 9% revenue decline in 2011 and analysts estimate a 19% decrease in 2012, with handset volume expected to be down 18%. Nokia saw its 40% ownership of the mobile phone market decline to 20% over the last decade—with the company’s smartphone prospects even worse, as Nokia only owns 3% of this market. Nokia has a lot riding on its Windows 8 phone and is taking Apple head on, but investors are still worried it might be too late for the company.
Microsoft has its hand in the mobile market with Windows Phone 8, its mobile operating system. Nokia is already producing phones running Microsoft’s Windows Phone 8, with other manufacturers, such as HTC, Google’s Motorola and Samsung, expected to offer Windows based phones. Microsoft announced its entertainment & devices division—which includes Windows Phone—grew revenue by 7.6% last fiscal year. Although Microsoft does not offer a handset, it does have other tactful advantages when it comes to gaining smartphone market share.
When RIMM first started its steep decline in 2Q 2011, it would appear many funds were burned. Going into the decline, billionaire fund managers owning RIMM included names such as Bill Miller, Bain Capital, Ken Griffin, Steven Cohen and D.E. Shaw. Even after RIMM’s decline began in the second quarter of 2011, Jim Simons took a new position and Ken Griffin upped his by 68%, as well as Israel Englander and Ray Dalio increasing their modest positions.
Most notably, of those funds buying into RIMM during 2Q 2011 were Prem Watsa of Fairfax Financial Holdings. Fairfax took an entirely new position of 8.3 million shares that made up 8% of the firm’s second quarter 2011 13F portfolio. As of 2Q 2012, Fairfax had increased their position to 26.8 million shares—10.4% of their 13F holdings.
It appears that funds are not falling for the value trap this time. As RIMM slipped below $10 during the second quarter of this year, the action from funds was mild. Jim Simons kept his position relatively stable at 7 million shares, as did Coatue Management, but Ken Griffin at Citadel Investment Group did increase his position by 170%. Other firms who continue to own shares are D.E. Shaw, Steven Cohen and Israel Englander. What are these fund managers holding on for?
It would appear the best possible outcome in the short-term is a takeover. Admittedly, the stock cannot go much lower before hitting zero, but more struggles—such as the continued delay of its BlackBerry 10 mobile operating software—have the company hanging in limbo. We struggle to see which company would find RIMM appealing, even at its $3.4 billion market cap.
Besides RIMM’s subscriber base and patent portfolio, the benefits are slim as its actual products are becoming more irrelevant. Any of RIMM’s top competitors could have easily taken the company out—with their respective cash on hand for 2Q coming in at: Apple with $28 billion, Microsoft $63 billion, Google $43 billion, and even Nokia had $10 billion. We are not putting too much faith in a takeover and believe the path of RIMM may be more like that of Nokia, unless its secretive BlackBerry 10 software can rekindle interest in the company, but this software is not slated to be revealed until 2013.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.