Since bottoming out at just $6.50 a share in September,
Research in Motion (Nasdaq:
RIMM
)
has surged more than 150%. The rally came seemingly out of nowhere,
as many simply assumed the maker of BlackBerry phones was
heading for the technology industry's graveyard.
In hindsight, it's pretty clear most investors were overlooking
the fact that the company had an ample amount ofcash on thebalance
sheet , a still-impressive user base exceeding 75 million people,
and a likely appeal for potential buyers at such distressed
levels.
Yet a host of factors is pointing to a possible imminent
pullback reversal for RIMM, perhaps by a significant amount. In
fact, some suspect that Wednesday, Jan. 30, may be the date at
whichshares start to lose steam. That's when RIMMwill release the
much-anticipated version 10 of its operating system. The
newly-revamped software is expected toyield greater functionality,
finally enabling the company to truly compete with the more
dominant
Apple (Nasdaq:
AAPL
)
and
Google (Nasdaq:
GOOG
)
platforms. These two firms now control 90% of the smartphonemarket
, so if RIMM can pick up lostmarket share , then this may prove to
be one of the greatest turnarounds plays of the current era.
But short sellers have a different take.
They have been boosting their positions in RIMM at a steadily
rising pace, even as the company has started to see alot
morebullish interest from long-oriented investors. RIMM is now the
fourth most heavily-shortedstock on the Nasdaq (after
Sirius XM Radio (Nasdaq:
SIRI
)
,
Intel (Nasdaq:
INTC
)
and
Frontier Communications (Nasdaq:
FTR
)
).
Surging short interest
Why do short sellers doubt RIMM's resurgence is for real?
First, many short sellers remain unconvinced that even with a
refreshed product line and software, RIMM could compete with Apple
and Google. Theynote that
Microsoft (Nasdaq:
MSFT
)
is working feverishly to build its own market share in the
smartphone space, so in their view, it's impossible for RIMM to to
garner double-digit market share, which would be twice as high as
current levels. Market research firmIDS predicts that RIMM will
control just 4% of the smartphone market by 2016.
Second, short sellers say that RIMM's decision to eliminate
monthly service fees for consumers will deeply damage theincome
statement . These monthly fees, which average $4 per user, carry
very high margins, off-setting the fairly low-margin profile of the
hardware business. In recent years, servicerevenue has accounted
for roughly one-third of sales, though that looks set to decline in
coming years.
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RIMM will still impose fees on enterprises that demand greater
security, and other bells and whistles. (Specific pricing plans
will be announced when the new software is released next
Wednesday). The companynotes that more than 60 companies in
theFortune 500 are testing RIMM's new software, but it's unclear
how many of them will commit to sticking with the BlackBerry
platform. After all, many employees now have smartphones that run
on Apple and Google's software, and are not necessarily inclined to
give them up. Also, companies will take their time before making
any major moves. "Our own checks suggest enterprises will take at
least four to six months to test the new BB10 OS," predict analysts
at Citigroup.
Third, RIMM's impressive growth in emerging economies may be at
risk. Markets such as India and Indonesia have become a key source
of growth in recent years, but a number of Chinese and Korean
vendors have revealed new models that will be priced far lower than
RIMM's current offerings.
Fourth, short sellers have been looking at what happened when
Palm released a new phone in 2009, which was expected to boost the
company's flagging fortunes sharply. Shares ran up in anticipation
of the release, but then subsequently tanked after the phone was
released, as actual sales came in well below forecasts.
Thebull case
Yet there are some good reasons why another camp of investors has
become quite bullish. These investors note that wireless service
providers such as
Verizon (NYSE:
VZ
)
are likely to throw considerable marketing support behind the
imminent launch of new BlackBerry phones. These firms know they
will be able to reduce the subsidies provided to the major hardware
players like Apple if there is greater competition.
And unlike Palm, RIMM has nearly $3 billion in cash and has the
staying power to patiently wait as market share rebounds. Indeed,
even with hefty spending associated with the launch during the next
12 months, RIMM will still likely have more than $2 billion in cash
a year from now. RIMM'sburn rate should be tolerable while
marketing spending rises, in large part because management has
already taken roughly $1 billion inoverhead out of the business. To
boost cash, management has even hinted it may look to sell off the
hardware business.
Lastly, bulls say that if the BlackBerry is able to stay even
moderately relevant among enterprise users, then the company might
become a solidacquisition target for a company like Microsoft. To
be sure, this argument was a lot more valid when shares were
trading in single digits.
Wall Street 's view
A few analysts who follow RIMM have become increasingly bullish as
well. RBC Capital, for example, has just raised the shareprice
target from $11 to $19, though this only represents about 10%upside
. Jefferies also upgraded the stock from "hold" to "buy" this week,
also with a $19 price target. They say RIMM's decision to allow the
BlackBerry e-mail service to run on Apple and Google's smartphones
is a wise one. And about the notion that the company will keep
losing users: "[RIMM's] subscriber base [is] likely to be more
preserved than feared," write Jefferies' analysts.
But most firms take a dim view. Here's a quick sample:
- "We consider the recent gyrations in RIMM's stock to reflect
trading momentum with no fundamental change in RIMM's outlook
yet. We are retaining our stop price target of $9.50," note
analysts at UBS.
- Merrill Lynch sees shares falling to just $7. "In our view,
RIMM's long-term outlook seems unlikely to improve and its
strategic options are diminishing."
- Analysts at Citigroup are perhaps the mostbearish , with a
target price of just $6 a share. They predict that RIMM'sprofit
margins will slump badly as servicerevenues start to
diminish.
- Goldman Sachs' analysts have a binary view of the stock. If
the company can indeed regain its footing and boost sales in
coming years (which is 30% likely), then shares are likely worth
$30. But if RIMM's steady downward spiral in revenues continues
(which they believe has a 70% chance), then shares are worth just
$11.
Risks to Consider:
As noted above, there are numerous upside and downside risks in
place, with signs of a slower-than-expected launch likely the
biggestdownside risk .
Action to Take -->
Though shares have performed remarkably well, they could keep
rallying yet higher if the new lineup of BlackBerrys gets off to a
strong start. But considerable headwinds remain in place, and next
week's official launch could mark the end of the recent period of
euphoria. Has the recent progress made by Apple and Googlemean that
RIMM will never regain its footing? That's surely what short
sellers -- and generally bearish Wall Street analysts are
anticipating. If you've owned this stock all the wayback up from
the September lows, then may be a wise time to take profits.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of VZ, INTC in one or more of its "real money"
portfolios.