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

by Dan March 25, 2011 7:42 am • Commentary

UPDATED 3/25/11 at 8:40am: RIMM is down in the pre-market almost 12% largely as a result of their guidance for FY Q1 that badly missed wall street expectations….Additionally the company did something that I think is pretty cheesy, they gave full year EPS guidance for FY 2012 that was well above wall street estimates even in the face of their expected Q1 miss…REALLY GUYS???  How could they possibly have the confidence in what has become an annual ritual of management suggesting that their “product road-map for the 2nd half of the year is very compelling” is gonna drive that sort of upside in the wake of the expected Q1 miss.

-This could be the death rattle for this company, not saying that is going to zero anytime soon, but certainly going the way of NOK and MOT. They are absolutely irrelevant on the innovation and execution front and that is what investors pay for in tech, aside from torrid growth.

-The list of reasons to avoid this stock just keeps getting larger in my opinion, the company warned of lower ASPs, higher r&d costs, higher marketing costs, lower margins, and when you combine that with the obvious weak product offerings and most importantly their competition keeps widening the lead on innovation……

-RIMM has some very hard choices to make and quickly…..1st scrap their existing operating system and offer customers the choice of Android, and second consider selling to MSFT if they are even interested.  This management has lost their way and I think a sale of the company would be a nice out for them.  MSFT has over $40bln in cash and given RIMM’s market now below $30bln this a very do-able deal and would help solve some serious issues MSFT has in the tablet and smart-phone space while also giving them a hardware platform to put their mobile OS on….in the enterprise this would be a great fit given both companies similar installed bases.  If these 2 companies are not speaking about strategic alternatives they will be soon, in my humble opinion……

SUGGESTED TRADES: over the last 2 weeks I have laid out the bear case twice on RIMM (I really hate the story, the products, their strategy and strongly dislike their management):

-Mar 21: BUY the APR 60/52.50 Put Spread for 2.20 (stock ref ~61.20) and

-Mar 9th: Buy the Apr 62.5 / 57.50 Put Spread for ~1.60 (stock ref ~64.00)

Both of these spreads will perform very well today with the stock trading below 57.00, i will look to take half off on the open and take some profits and see how the stock performs…..Interesting to note last Friday the day after NKE disappointed the stock gapped lower and continued to sell-off all day and close on the lows…..If large holders finally pull the plug on the story the stock will go down for says likely to the low 50s.

FROM 3/21/11:

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….