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A Contrarian Look at Research in Motion

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shares of Waterloo, Ontario-based Research in Motion (NASDAQ: BBRY) plunged after the company reported its third quarter earnings after hours on Dec. 20. The BlackBerry maker, which had rallied 3.6% in anticipation of its earnings, posted an adjusted loss of 22 cents per share on revenue of $2.73 billion, topping the analyst consensus of a loss of 35 cents on revenue of $2.65 billion. 

Despite beating estimates, the 47.2% drop in revenue from the prior year quarter’s $5.17 billion raised concerns that expenses for its eagerly anticipated BlackBerry 10 platform were draining cash reserves. However, cash reserves increased $600 million to $2.9 million from the previous year.

Before we proclaim that the sky is falling and start to sell with the herd, I think it’s wise to study the contrarian view on Research in Motion.

Positive Catalysts on the Horizon

Earlier this month, RIM shares rallied sharply after the U.S. government canceled plans to purchase Apple’s (NASDAQ: AAPL) iPhone for its employees, instead giving Research in Motion’s flagship BlackBerry devices one more chance. BlackBerry’s enterprise-level security, which is considered more robust than that of Apple’s iOS or Google’s (NASDAQ: GOOG) Android, was cited as the primary reason for the sudden change of heart. Enterprise users still favor BlackBerry’s system over Android, due to the threat of malware and security issues in Google’s operating system, which could compromise sensitive corporate data.

This development has cast doubt on the outlook first presented by the Silicon Valley/San Jose Business Journal, that claimed Apple would overtake Research in Motion and claim the title of top operating system for business enterprise users by the end of 2012.

RIM management has promised that BlackBerry 10, the long delayed update of its mobile operating system, will be available by the first quarter of 2013. In addition, bullish analysts believe that BlackBerry 10 has the ability to capture market share from Samsung, Apple and Google, since strong developer and carrier support is anticipated on its release in January. RIM also announced an upgrade to BlackBerry Mobile Fusion 6, which allows BlackBerry devices to interface with iOS and Android devices.

Can the Underdog Climb the Ladder?

Before we get ahead of ourselves and proclaim that the skies have cleared and a turnaround has started for Research in Motion, let’s take a look at the chart of third quarter smartphone shipments (ending on Sept. 30) from the five largest players in the market.

<table> <tbody> <tr> <td>Company</td> <td>3Q Shipments</td> <td>Y-O-Y Growth</td> <td>Global Market Share</td> </tr> <tr> <td>Samsung</td> <td>55.5 million</td> <td>103.6%</td> <td>32%</td> </tr> <tr> <td>Apple</td> <td>26.9 million</td> <td>57.6%</td> <td>15.5%</td> </tr> <tr> <td>Sony</td> <td>8.8 million</td> <td>41.1%</td> <td>5.1%</td> </tr> <tr> <td>HTC</td> <td>8.4 million</td> <td>-36.1%</td> <td>4.8%</td> </tr> <tr> <td>Research in Motion</td> <td>7.3 million</td> <td>-38.4%</td> <td>4.2%</td> </tr> </tbody> </table>

It’s clear that the past year has been a devastating one for RIM, while the top three players -- Samsung, Apple and Sony -- are posting strongly positive year-on-year growth.

However, a second look at the chart tells us that Research in Motion is actually faring strongly in a Google-dominated market. Three of the five companies -- Samsung, Sony and HTC -- run modified versions of Google Android.

With its own operating system, Research in Motion is in a far better position than HTC, which is still struggling to make its Android smartphones stand out in comparison to Samsung’s flagship models.

Research in Motion is also still ahead of Nokia (NYSE: NOK), which is trailing in seventh place with 6.3 million units shipped in the third quarter. Nokia’s smartphone shipment volume plunged 38% quarter on quarter, and it is still relying on Microsoft’s (NASDAQ: MSFT) Windows 8 smartphones to turn around its struggling business in the coming year.

Institutional Investors Are Still Bullish

Institutional investors, some of Research in Motion’s biggest customers, are still confident in the company’s growth prospects. Over the past quarter, hedge fund interest in RIM rose by 32%. However, Citadel LLC CEO Ken Griffin notably sold off 80% of his stake in RIM.

A main concern that overshadows RIM’s recent victories is its product mix of lower-end BlackBerry phones, which the company has been pushing out to tread water until the release of BlackBerry 10. Analysts are concerned that these lower-end phones will cause margins to contract, a problem that has been exacerbated by increased competition from hungry low-end smartphone manufacturers from China, such as Huawei. Analysts, such as Sterne Agee’s Shaw Wu, were not satisfied with “the unanswered questions around the future of RIM’s high-margin services business” in the company’s most recent conference call.

For now, bulls are betting that Research in Motion’s most recent quarterly earnings is a legitimate sign of good things to come. The stock is up 6.3% over the past month and 68.6% over the past three months, so the sentiment is still bullish, despite its recent post-earnings 23% plunge.

Could the underdog Research in Motion stage an eleventh hour comeback and surprise Apple and Samsung? Less than a decade ago, few believed that “underdog” Apple would ever recover, and no one believed that mobile industry leader Nokia could be toppled. If RIM plays its cards perfectly in the coming year, it could very well be granted a second chance at recapturing the market it helped create.

Leo Sun is long Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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