RIMM: Were the Bears Right All Along?

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

Research in Motion (NASDAQ: BBRY) announced its quarterly results yesterday, inducing a 9% slide in the aftermarket trading. The company was able to beat the Street's revenue and earnings estimates and maintain its ASP. There was no major decline in the subscriber base which declined from $80 million to $79 million. The diminishing revenue expectations from BB10 have created a sell-off. This was also the primary concern raised in the management’s discussion and there was no satisfactory response from the company's management. Investors should not take the lower revenue potential of BB10 lightly because BB10 is the only egg in RIM's basket. I believe it's the best time to short RIMM, as the stock is trading well above the consensus price targets and will continue to shed as the January launch date approaches.

FY3Q2013 Results

Research in Motion announced its 3rd quarter earnings yesterday. The stock was down 9% in aftermarket trading. The market was expecting RIMM to report an EPS of $-0.35 and revenues of $2.66 billion. The company exceeded Wall Street’s expectation of revenues and reported $2.7 billion. The diluted GAAP EPS was reported at $0.03, but if we exclude the $166 million tax settlement and adjust $38 million from the CORE program, it comes down to a loss of $0.22 per share. The results were much better than Wall Street expected and also showed signs that the restructuring efforts were paying off. A key concern of investors has been the ability of RIMM to finance its continued losses. The company eased nerves on this account by declaring a $600 million cash increase, bringing total cash to $2.9 billion. In other good news the company was able to sell 7 million devices during the quarter without compromise on ASP.

A primary investor concern has been the falling ASP and ARPU. With diminishing new device sales, a bulk of RIM profitability comes from its services segment. As we can see below, the ARPU have relatively stabilized in the last 3 quarters, but declined from approximately $36 to $34 in the third quarter. The company has been able to maintain its subscriber base; it declined from 80 million to 79 million during this quarter.

BlackBerry 10 Margins

The primary investor concern which was instrumental in tanking the stock was the lower than expected revenue potential of the new BB10. The stock had earlier appreciated, after the company beat earnings but tanked as it became clear that ASP and ARPU will suffer once BB10 is launched. Investors and analysts have been regarding BB10 as RIM's final turnaround bet. The news that the company would be offering it on lower price points was a key concern for investors. This was comprehensively addressed in the Q&A session; the response from management was not satisfactory enough, as can be seen from RIMM's tumble. In response to a question from Kevin Smith (Macquarie Research) about the new pricing segmentation of BB10 services, the management had the following to say:

"..It's a little bit of a menu thing that you can choose and pick and that then will basically govern the pricing. But clearly, the service offering in those enterprises are going to be segmented and specific to those segments."


The earnings were a mix of bad and good news for investors. In terms of magnitude and long term impact, the lower price points for BB10 outweigh any positives. The stock is currently trading at a 30% premium on its sell side consensus price target of $9.70. The company has shown that it has the operational capability to conserve cash by restructuring and that does give RIM some breathing room. I believe investors should not take the bearish revenue outlook of BB10 lightly. I think RIMM will continue to depreciate as we head for a BB10 launch in late January. While the earnings have eased immediate concerns, there are a lot more questions on BB10 ability to induce a turnaround. Investors should expect ARPU's to suffer from the launch of BB10. The short flow is currently 27.3% and the short ratio is 3.22. I believe there is not much room for upside and RIMM will continue to slide as the BB10 launch approaches. Therefore, I recommend investors to short sell RIMM.

I also recommend investors to go for Nokia (NYSE: NOK) as a turnaround bet. As my previous article on Nokia shows, the stock is still trading at a significant discount. The Lumia has already proven its hardware superiority on the market competitors, which is why it remains an excellent buying opportunity.

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