Thursday, 24 March 2011 19:22

Research in Motion Drops 10% After Hours, Precisely As We Warned Two Months Ago - MARGIN COMPRESSION!!!

On January 20th, I posted "Blackberries Lost More Market Share Than We Bearishly Anticipated While RIMM’s Share Price Spikes: Is It Time To Revisit the Bear Thesis?". I turned bearish on RIM last summer and made some money on its dip back then. Shortly afterward, its shares did the QE thing, despite the fact Android started sucking up market share everywhere while simultaneously squeezing margins like orange juice. As excerpted from the aforementioned post:

We have updated our mobile OS and handset manufacturer market share model and will make it available to subscribers as an online app by next week. In the meantime, let’s review some of the findings – vendor by vendor. First up is Research in Motion. This was a profitable short in 2010, with the share price hitting our targets within 100 pennies. Since then, the stock has risen appreciably. Let’s take a look to see if the rise was justified.

Page 5 of our Research in Motion forensic analysis (released in the summer of 2010 -  File Icon RIMM Forensic Analysis and Valuation – Professional & Institutional or File Icon RIMM Forensic Analysis and Valuation – Retail) clearly stated that while we expected RIMM’s handset shipments to rise as a result of a rapidly expanding smartphone market, it will lose considerable market share....

As it turns out, it appears that we were erred slightly to the optimistic side with an 18% market share estimate for 2010. By the end of the 3rd quarter, RIM has fallen to 15.3% according to information calculated from IDC, and its decent has accelerated far faster than even we (the bears) have anticipated – a full 350 basis points for the quarter. This is 6x the decent of last quarter and 7 x the decent of the quarter before that. It is quite safe to assume that they will be materially below this point at year end (the data that we crunch is lagged by a quarter). This market share loss is most assuredly caused by the outsized growth of Android, which I will demonstrate in a minute. Below are charts generated from an updated version of the subscriber document File Icon Smartphone Market Model – Blog Download Version:

As you can see above, for the full year of 2010 RIM has trailed smartphone market penetration growth and that trail has increased each and every quarter with the rate of decent rapidly increasing.

RIM’s share price has benefited from an increasing equity market as well as the announcement of new products. The Torch, although possessive of redeeming new qualities, is essentially still a generation behind Apple and 1.5 generations behind Android. See RIM Smart Phone Market Share, RIP?

Research in Motion is following the EXACT path we at BoomBustBlog had laid out for it since the 3rd quarter of 2010. Notice the share price announcement since our January 20th pronouncement.

So, what did RIM have to say during the earnings release? From the WSJ:

Research In Motion Ltd. posted a 32% jump in quarterly profit, but the BlackBerry maker warned of lower earnings and revenue in the current period. Shares fell 10% in after-hours trading. The Waterloo, Ontario, company also said it plans to allow Android applications to run on its PlayBook tablet computer, due out next month. The move will greatly expands the number of apps available on the PlayBook. But it is a concession by RIM, as it has struggled to compete against Apple Inc. and a slew of devices running Google Inc.'s Android software.

This should be of absolutely no surprise to BoomBustBloggers!

RIM said it shipped 14.9 million BlackBerrys in the quarter ended Feb. 26, near the top of its guidance of 14.5 million to 15 million units, but below the 16.2 million iPhones Apple sold in its December quarter.

RIM has set the North American launch of the PlayBook for April 19. Executives said Thursday the tablet's rollout wouldn't be affected by the quake in Japan, and RIM plans to release three more tablets this year.

The PlayBook launch comes as RIM struggles to compete in the U.S. and increasingly relies on sales in emerging markets for its growth, where cheaper models make up more of sales.

The competition is coming in both the consumer and corporate markets, the latter of which RIM has traditionally dominated.

Again, clearly forecast in the BoomBustBlog research reports.

... For the current quarter, which ends in May, RIM forecast earnings of $1.47 to $1.55 a share on revenue of $5.2 billion to $5.6 billion. The outlook is below the Thomson Reuters mean estimates for the quarter of earnings of $1.65 a share on revenue of $5.64 billion. RIM said the guidance reflects a shift towards cheaper handsets and an increased level of investments for research and marketing, especially for its tablet. The range is also wider than usual "to reflect the risk of potential disruption in RIM's supply chain as a result of the recent earthquake in Japan," it said.

I have been preaching MARGIN COMPRESSION for some time now. Google's Android has totally upended the mobile computing space by issuing in nearly unassailable business model that pushes a technology that grows and morphs at least 2x the speed of its closest competitor. It has went from last place to 1st place in global market share in just over a year (historically unprecedented) while retaining the pole positing as the fastest growing mobile OS. RIM is getting smoked and these quarterly reports are heavily lagged and backward looking. They don't come close to revealing RIM's current position and predicament. RIM will get smoked in the tablet wars, even if it's Playbook is a hit - which I doubt it will be. Speaking of tablets and margin compression...

Shares of RIM fell $6.45 to $57.64 in late trading Thursday, after ending the 4 p.m. Nasdaq session at $64.08, up $1.97.

Front month and two month put holders/BoomBustBlog subscribers should get paid quite handsomely!

Professional and institutional subscribers are strongly urged to review in full detail, the BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download post and the actual professional/institutional subscriber model included therein. To recap...

The model is written in Excel 2007 and is an abbreviated version of the model that we built for RIMM in house. It has 9 tabs, all of which are listed below except for the first tab which is my contact information. Upon opening the model, you should click the “Assumptions” tab and populate the green cells with the red fonts with the assumptions of  your choice. Feel free to use data and trends from our Smart Phone Market Model to ensure you have the benefit of the clearly delineated historical and current trends. The current model will be replaced with an updated, refreshed version available online within 7 days. Click any graphic to enlarge.

RIM Model Assumptions

 

RIM Model Factors Driving Growth

After populating the assumptions tab, jump to the “Factors Driving Growth” tab and choose the player whose market share and penetration data you want to populate the valuation model for the sake of comparison. The choices are “Nokia”, “RIMM”, “Apple”, “HTC” and “Others”. This tab is annual data only.

 

RIM Model Quarterly Factors (driving growth)

On the next tab, you can do the same as the previous (this tab is quarterly growth). Each of the growth tabs has charts that are print and presentation quality. Just be sure to tell everyone where you got thesis, data and analysis from :-) .

Other tabs in the model…

RIM Model Income Statement

 

RIM Model Device Market Analysis

 

RIM Model Revenue Analysis

 

RIM Model Device Revenues

 

Valuation and Multivariate Scenario Output

Final output is RIMM’s valuation using our analytics and your assumptions as input in the assumption tab above, as well as a multivariate scenario analysis showing changes in quite a number of variables (assuming all others remain the same) and their effects on your base valuation, as well as the percentage upside/downside from the current price.

I personally see a clear leader in mobile computing becoming visible in 2012. Using options, a minimum of 2012 expiration OTM and ATM contracts can be purchase at the most optimistic break points demarcated by the model above after being populated with assumptions you feel most valid. I will have a proprietary BoomBustBlog option model available for download to paying subscribers by the end of next week, at which time we will revisit the analysis above.

Reggie Middleton on Research in Motion

  1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
  2. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
  3. RIM Smart Phone Market Share, RIP?
  4. Android is gaining preference as the long-term choice of application developers
  5. RIM Smart Phone Market Share, RIP?
  6. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download

The following are subscriber downloads and illustrations. Please click here to subscribe or to upgrade your subscription.


Last modified on Thursday, 24 March 2011 19:22

3 comments

  • Comment Link kweiner Friday, 25 March 2011 10:21 posted by kweiner

    Thanks for your reply. For homebuilders and casinos, I meant as short plays!

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  • Comment Link Reggie Middleton Friday, 25 March 2011 04:14 posted by Reggie Middleton

    "Reggie: I am a fan of yours, a paid subscriber, and a RIMM short. But we all know RIMM went up since you recommended shorting it (a function of QE and market euphoria, I’m sure)."

    Thanks, but you shouldn't be surprised. I use options a lot and that is how I express implementing a positions. This is a fundamental and forensic site, not a trading site. I did say I will attempt to recommend some trades, and I did briefly sift through the topic, but we are not there yet. Any stock you go short or long on will probably move in the opposite direction. The markets don't work for you, they are free (or more often manipulated spirits). That is where risk management, cash management and strategy comes in.
    You must use stops, or be willing to lose most of your position. You must be clear of instances where market information can prove or disprove your thesis. RIMM is a good example. You could have made money on the RIM short last year, and it popped up in price. This is so because trailing stops would have preserved profits. The same goes for this year. IF you were to put a position in, you should have done it to coincide with the earnings announcement since that is the event that would have sprayed disinfecting light on the validity (or lack thereof) of my investment thesis.

    "To your credit, you are very clear about this up-front. So I am surprised to read you say that BBB subscribers who bought front- or next-month puts… did you recommend buying puts on RIMM? If so, where? If so, why, when the timing is impossible to predict?"

    As I have said ad nauseum, I don't recommend trades. I offer my opinion and analysis (with roughly 85 to 90% accuracy over the last 4 years or so) on the fundamentals and the macro outlook. I buy puts and calls, personally, but I don't tell others what to do.

    " If so, why, when the timing is impossible to predict? "
    The timing was not impossible to predict on this. I gave the heads up on January 20th. They announced March 24th, and the announcement was public knowledge. As a matter of fact, there is a commenter on this site who challenged me to admit that I was wrong on RIMM earlier on the 24th and to admit before the earnings announcement that RIMMs comeuppance was at least 6 months away (which RIMM says was more like now). He knew the 24th was a day a catalyst would occur, he was just on the wrong side of the BoomBustBlog :-)

    "The problem with buying options is that one pays a premium and often even if the stock does what you expect, it does it after your option expires."

    That is probably because you are buying too short a maturity. Take simple calculator and measure the costs of short and long dated options by dividing the calendar days into the total premium. You will then realize how EXPENSIVE short dated options are in relation to long dated options. Yes, you will have to pay more out of pocket for long dated option, but you get peace of mind + less volatility. Remember, you can always resell time value premium, regardless of the accuracy of your direction thesis. This is something that simply cannot be done with short dated options. In short (pun intended), short dated options are much more for speculators or those who want to leverage up without paying the time premium, hence are willing to swallow the volatility of options without the time premium cushion. If one were to look at the growth rates, market share charts, and margins of the various players involved over the last two years, RIMMs predicament was basically a forgone conclusion. Thus you decide your risk tolerance, and place the appropriate trailing stops where they belong, all centered around a catalyst, which is nearly guaranteed to be at least the quarterly earnings announcement.

    "Incidentally, I got short most of RIMM shares by selling calls. I’ve sold calls a number of times for each time that they expired in the money, so I got a profit there. Once I got short, then I also sold puts under my short positions; I now have some April 16 puts at 55 and at 52. They may or may not be in the money in a few weeks, but it’s ok because I was paid a premium to sell them and those strikes are under my short price on those blocks of RIMM stock."

    Sounds like you did well. The problem with selling options is that the income stream is smoother in general, but when you do get it you get hit much harder. Risk management is essential - and even moreso in being a net seller.

    As of the the homebuilding industry, as large, publicly traded debt laden companies it is over and will not return for at least 4 or 5 years, if ever (as the publicly traded growth engines that they were). When QE's cessation allows one to trade the fundamentals again, I may revisit these companies. Until then...

    I am not a gambler, and don't see any big upside in the casino stocks although I haven't looked into them in 3 years so I am not speaking from a position of authority. Macau was the catalsyt in 2009, and I think China is a big bubble. We shall see.

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  • Comment Link kweiner Friday, 25 March 2011 02:14 posted by kweiner

    Reggie: I am a fan of yours, a paid subscriber, and a RIMM short. But we all know RIMM went up since you recommended shorting it (a function of QE and market euphoria, I'm sure). With fundamental analysis, there is no way to predict timing. To your credit, you are very clear about this up-front. So I am surprised to read you say that BBB subscribers who bought front- or next-month puts... did you recommend buying puts on RIMM? If so, where? If so, why, when the timing is impossible to predict? The problem with buying options is that one pays a premium and often even if the stock does what you expect, it does it after your option expires.

    Incidentally, I got short most of RIMM shares by selling calls. I've sold calls a number of times for each time that they expired in the money, so I got a profit there. Once I got short, then I also sold puts under my short positions; I now have some April 16 puts at 55 and at 52. They may or may not be in the money in a few weeks, but it's ok because I was paid a premium to sell them and those strikes are under my short price on those blocks of RIMM stock.

    The point being it's nice to be a seller of options. Being a buyer requires exquisite timing.

    Now, what do you think of PHM, KBH, LEN, TOL and the homebuilders? And what do you think of LVS, MGM, WYNN and the casinos? Speaking of stocks that have to crash, but who knows when... :)

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