If MSFT/NOK Rumors Are True, Then RIMM’s Only Chance for Future Consumer Relevance Lies With Android

by Dan June 1, 2011 11:46 am • Commentary

The Boy Genius Report is reporting rumors this morning that MSFT has reached a deal to Buy NOKIA‘s phone unit for $19billion….This would put RIMM in a very tight spot and leave them with one option, to scrap their OS and use Android to compete with AAPL‘s iOS, GOOG‘s Android and what would likely be stronger MSFT mobile OS with a wide reaching installed base….. 

I have been short RIMM on and off for the last year, largely predicated on one fact that has remained constant; “RIMM will likely never have greater margins on their products than they have today” and thus they are heading into commoditized product hell (see NOK .)  When RIMM”s market cap dips there have been certain MSFT take over rumors…..but if NOK news true then there is not a real likely buyer left…..(maybe CSCO, but they have their own host of problems and given recent intentions to restructure this would be unlikely).

-Stock is down 6% today as holders continue to peel out of the name, and pushing the stock to lows not seen since late 2008…….Investors fear a Nokia like reset to guidance when they report June 16th.   I am long June Put Spreads and will hold on a bit waiting for the puke below $40.

As for MSFT given recent activist investor interest I can’t imagine that this would fly as this would not be a great use of their cash and can’t imagine that the board and Ballmer could withstand almost $30billion of acquisitions, including the recent relatively unpopular $8.5 billion Skype deal.

Jeffiries had the following to say regarding RIMM in a note this morning to clients:

We have reviewed RIM’s margins and believe that the handset business could
be much lower margin this quarter and going forward as ASPs collapse. We see
around 30% GM for the handset business in FQ1 (May), which implies close to
breakeven OM. Also, we believe Nokia’s warning is a possible preview of what
awaits RIM. We reiterate our Underperform rating and $35 price target.
Hardware margins pressured: we estimate that the hardware segment had 35% gross margins in FQ4 but that they will fall to 30% in FQ1. We also estimate that the hardware segment’s operating profits will be near breakeven. This means RIM is becoming totally dependent on subscription revenue, which lags hardware sales.

1.Implications of Nokia’s warning: we think what is happening to Nokia could be a precursor to what could happen to RIMM: 1) Nokia’s transition from Symbian to Windows highlights the difficulties in OS transitions. 2) Nokia cited aggressive pricing from Android smartphones in China and Europe as a key factor in lower Q2 guidance. 3) Nokia’s share loss puts them in a weakened positioned with carriers and consumers when they do eventually
bring compelling products to market. We believe the transition from Blackberry OS to QNX will cause RIM to see the same pressures and challenges as Nokia is seeing, including ASP decline, margin erosion, and weakened carrier and consumer mindshare.

Implications of new low-cost iPhone: the new iPhone firmly targets the mid-range smartphone market and the pre-paid markets, both mainstays of RIM’s device sales. We believe RIM is at greater risk of share loss to the new product than other vendors.


LOW CONVICTION SPECULATIVE NOK TRADE: If You want to take a shot on NOK look to short dated call spreads…the company has about $6 billion in net cash and probably not a ton of downside near term, but if you use options only risk what you are willing to lose….if the rumors are false stock likely to go back to this mornings lows below $6.50 and June options will start to decay quickly.

NOK ($6.70) BUY JUNE 7/8 Call Spread for .14

-Buy Jun 7 Call for ..18 and

-Sell June 8 Call at .04

Break-even on June Expiration:

stock btwn 7 and 7.14 lose up to .14.

stock btwn 7.14 and 8 make up to .86,

stock above 8 make .86.