RIMM’s (Nasdaq: RIMM) expectations have finally been driven deeply into the red – an expected loss of 46 cents for this upcoming quarter, 1.49 loss for the current fiscal year and 71 cents for the next fiscal year (year ended February 2014).
I earlier suggested that potential investors in RIMM should wait until these estimates go deeply negative. They are now currently negative and I would suspect after this quarterly report, the company is going to get expectations to the point where the risk has been correctly priced in if not already there.
While I am not buying RIMM shares, people that believe in Blackberry 10 and its potential probably have a correctly timed entry point in the remainder of this year – especially as most institutional investors will be sitting on tax losses and would likely want to clear it out of their portfolio or risk embarrassing themselves.
There is still obvious technology adoption risk for the company – if they execute well then you might be sitting on a double or even more if they are able to regain market share (and perhaps the more important mind-share of the developers). If they don’t, well, then you get a Nokia (NYSE: NOK) where you start pricing the company based off of salvage value.
Media are covering this so I’ll write a few words about their last quarterly report (Q1-2013).
As I indicated in my previous post, anybody thinking that RIMM will make a technological comeback is best to wait until expectations have been driven deeply negative. The quarterly result was much more negative than analysts expected (even when backing out the $335M goodwill expense) – about a $132 million loss, or roughly 25 cents a share, which excludes depreciation and amortization.
Analyst estimates averaged roughly a breakeven quarter.
It is very likely that year-end estimates and next year’s estimates are going to go negative, and this is when lower expectations finally baked into the price of the stock. After-hours trading has RIMM down 15%.
Perhaps more damaging was the announcement that their next-generation project (Blackberry 10) will be launched later than they thought, aiming for the first quarter of 2013. While this is obviously not good for them, it would be even more disastrous for the company if they released something incomplete or half-baked (like their playbook). They do have about $2.2 billion in cash to deploy and no debt on the balance sheet, so as long as they can keep the expense side of their ledger lean, they will be buying themselves enough time to get another product out the door.
In terms of risk-reward, the downside to the stock is probably another 50% from current levels. Technology companies with third-ranking products in the marketplace don’t tend to warrant much of a valuation premium.
I have no position in RIMM. Just following.
RIMM (Nasdaq: RIMM) is down to lows not seen in a long, long time. They closed today at US$9.11/share.
The story is fairly well-known: they’re getting cleaned out by Apple and Google/Android. It is frighteningly similar to Nokia in nature, where a technology giant becomes obsolete in short order by failing to catch up. The one moat to their business, a secure email and messaging system, seems to be eroding. As a result, they are losing the game in the corporate world, and when this occurs, it is pretty much lights out for RIMM. Or is it?
I haven’t been tracking the technology and I believe somebody would intuitively have to be keeping their knowledge updated of the upcoming technology trends in order to make an informed call on that front. Since my cell phone is considered to be barely functional in today’s terms, I am not that person. All I can do is read their financial statements, but while they historically have been quite profitable, it appears that the market is indicating otherwise. For example, look no further than analyst estimates, as compiled by Yahoo Finance:
Without knowing anything, my advice to any potential investor in RIMM would be to hold back until that February 2014 estimate is deeply negative.
RIMM has about $1.8 billion in the bank without any debt, so they do have some maneuvering room for research and development. I have no idea whether Blackberry 10 will actually be a competitive product or not, but clearly the market is not thinking so. If you believe the market is wrong, wait until those estimates go even lower and overreach on the downside – then invest. Today’s analyst report from Morgan Stanley that downgraded the company to a sell and called for its break-up was one more piling onto the bad news sentiment. Will there be more?
A fairly interesting tidbit is that Prem Watsa, from Fairfax Financial (TSX: FFH) fame is recently on the board of RIMM and Fairfax has 26,848,500 shares of RIMM, a position that is now deeply underwater.
While Apple’s iPhone continues its consumer mania and Android being almost akin to what Microsoft Windows was when it was dominant in the 1990’s, one has to wonder whether there is a market for the low end of mobile phone users.
For example, this includes myself, where I am perfectly happy not having a data package which is slowly making me a rare individual in my age bracket.
So I took a brief look at Nokia (NYSE: NOK) which attempted to compete in the high end market but obviously lost. However, there should still be a space for them in the market – just not at the insanely huge margins that companies like Apple get on every iPhone. It is not like the winner-take-all market of operating systems back in the 90’s – although the application market does drive some component of sales, ultimately if the device has a web browser and is compatible with the local telecom company’s wireless infrastructure it will sell. The question is at what price.
Strictly looking at the numbers, paying a $4 billion enterprise value for a company still making $44 billion in sales seems like a relatively decent margin of error cushion. An additional factor is that the analysts still project Nokia to be losing money this year and barely making anything in the next year. Ideally you’d want to see both of those projections to be even less rosy.
This is why I wouldn’t invest in RIMM at the moment – expectations have not been hammered down enough, although they are getting to the point where your margin of error is somewhat compelling relative to sales and what you are paying.
Disclosure: No positions in either company.