RIMM Earnings Mar 24-Express Bearish Views Through APR Put Spread–Define Risk

by Dan March 21, 2011 8:04 am • Commentary

RIMM $61.20
-company reports mar 24 after the close
-options market implying about 7% move
-avg 4 qtr move ~5.5%, over the last 8 qtrs almost 9.25%….Given the increased volatility we have seen of late int he last couple weeks the implied move appears on the cheap side, especially when you consider the list of headwinds I list below for the company.

MY VIEW: QTR was likely challenged with VZ‘s iPhone launch in Jan and the continued onslaught of android phones…….even if they print a decent sell through number I suspect the ASPs are gonna stink as an increasing % of  units are being sold into emerging markets where ASPs much lower than North America/Western Europe and they are losing a lot of share here…..

-Also this quarter could be particularly volatile when u consider what we heard from MRVL in their pre-announcement 2 weeks ago about slowing orders at a large customer (RIMM) and the potential for component shortages due to Japan being off line…..additionally the company should continue to see margin pressure as a result of the r&d and marketing spending attributed to the launch of their tablet “Playbook” which Steve Jobs already told us in Jan was dead on arrival………

-While the company has not set a firm date for the release of the Playbook tablet, they had indicated by the end of March, given the potential for longer lead times due to component disruption in Japan, there could definitely be increased headline risk associated with a delay as Motorola, Samsung, HPQ, MSFT (just to name a few) are aggressively launching tablets to compete with iPad2.

all that said stock is cheap trading at 9x 2011 earnings while still expected to grow sales next year by 20%…..so in my opinion it is hard to short on valuation alone, you have to believe that margins and ASPs will continue to decline and that the company will continue to lose market share in the developed world to ride this one on the short side…
– I strongly dislike the company, largely because I find their products and their strategy to be so last decade, and when they try to get up to speed with say touchscreens they absolutely bumble it (see Storm, Storm2 and Torch).

(Get a free trial to read trade below)

TRADE: Buy Apr Put Spreads to Express Bearish Views and Define Your Risk
BUY the APR 60/52.50 Put Spread for 2.20
-Buy 1 Apr 60 put for 2.85 and
-Sell 1 Apr 52.5 put at .65

Break-Even on Apr Exp:
Downside: btw 57.80 and 60 you can lose up to the 2.20 in premium you paid, above 60 u lose all (or 3.5% of the underlying)
Downside: btw 57.80 and 52.50 can make up to 5.30 or 8.5%, below 52.50 you make 5.30.

Dan Lays out the Trade 5:10 into Video

TRADE RATIONALE: I think RIMM is going the way of NOK and MOT and it is just a matter of time, this company will never have higher margins and ASPs than the ones that they report this qtr and when u consider that they have been losing market share in the only markets that actually buy the higher end phones that command the higher ASPs then i am hard pressed to see how they don’t go the way of those once great handset makers. The only thing they really have going for them is their installed base in the Enterprise (business users which generally pay higher ASPs and have better margins than their consumer offerings), but they are holding on to that dominance like MSFT is holding on to Windows dominance…….

–While i want to be short into the earnings print, i want to Define my risk, the stock is off about $10 from recent highs, any good news and the stock will be back up to high 60s.…and as always MSFT take out chatter got going again once the cloud storage partnership was announced last week, and you wouldn’t want to be short RIMM if MSFT finally decides to make a silly acquisition out of desperation….