Update RIMM: Is Sentiment So Bad That It Could Be Good For the Stock Near Term?

by Dan December 2, 2011 9:41 am • Commentary

Update Dec 2nd 2011: RIMM is trading down 7% this morning as the company cut their outlook for Q3 to be announced Dec 15th and for the full year 2012.  This disappointment was not unexpected, and I don’t own the Dec call spread for  turnaround in their business, bu t for the prospects that their management will take aggressive action to partner or explore strategic alternatives to remaining a stand alone.

Some would have expected more weakness on the pre-anouncement, but as I said above poor results are baked into the cake here….In some ways with short interest above 10% of the float you could possibly see a similar reaction to LULU’s disappointing results yesterday where the stock opened on the lows and spend the rest of the day rallying from that level (wishful thinking i guess).

If you are a large holder and familiar with the story and still long, today’s news shouldn’t change your view too much, if anything you want the bar lowered enough where the company may be able to start beating estimates again if they can stabilize market share losses and cut costs.

This thing has activist investor bait written all over it, and like I have said before, not the Canadian kind, but the Cark Ichan/Daniel Loeb/David Einhorn  rip your face off kind.

The Dec call spread that I am long for about .63 is now worth .25 with the stock 17.50 and as of now I will hold on…..


Update Nov 29th, 2011: No New trade here, but RIMM is up 5.5% this morning following an upgrade by Sanford Bernstein from Under-Perform to Market-Perform, I think in English that means Sell to Hold.  Here are the quick highlights from their research note this morning to clients:

RIM is down 77% since its highs of February this year and, although we do not change our fundamental views on the company we upgrade the stock to market-perform. The company’s current challenges are now well understood by investors and we believe a failure of the current strategy is now well priced-in and we see upside risks making a short position unwise today.

In the medium term, as the failure of RIM’s current strategy becomes more obvious, we see shareholder activism leading to a change in management and a takeover – or at least the anticipation of it, as potential upsides making the risk-reward of a short position not attractive anymore.

We nevertheless do not recommend buying RIM to play the above scenario before getting some evidence that a major change (credible activism, change in management attitude) is underway. We also continue to see downside risks as the recent negative sales trend could accelerate and the accumulation of product failures could trigger major write-offs and marketing extra-costs.


This fairly well summarizes my view on the name.  Unless they announce some form of strategic review the stock will continue to get hit on inevitable and continued deterioration of their business.  This note doesn’t change anything for me,and as I have said below, this upcoming earnings event could end up being a fairly binary event.  I think the only way to play for an upside move is through calls or call spreads.  If they do not get proactive the stock is very likely to go lower on the merits of their results and guidance alone.

The bet that I am making (using profits from some very successful bearish trades in the name this year) is the management comes to their senses and does not continue to fiddle their thumbs while Rome is burning.  If they do they will see the company go the way of PALM in the coming quarters.

Natural buyers are few, and at this point to me the most likely are MSFT and Samsung.  MSFT could go down the GOOG route by acquiring hardware,but they appear to be opposed to this strategy.  Samsung, LG or HTC all big Android vendors could be interested to further increase their North American presence, but Samsung may be the only real potential buyer of the Asian crew.

Bernstein’s View on a Potential Buyer:

We do not see an obvious buyer for RIM today; however, this is subject to rapid change. At present, HTC has other troubles to deal with and does not have the balance sheet required for an all-cash acquisition (and RIM’s board would be unlikely to approve a share swap offer). We believe that

Microsoft still sticks to its “no hardware” policy in terms of acquisition in the mobile space. Samsung and Apple are unlikely to look closely at the opportunity as they don’t really need it and probably see as much value in letting RIM continue to lose ground than in attempting a hostile and complicated acquisition.

Lastly, we do not think Google has any appetite for acquiring any hardware business. MMI was an exception to the rule solely driven by Motorola’s patent portfolio. We nevertheless recognise these things can quickly change. In particular, HTC could partner with a financial sponsor (e.g. private equity) to carry out a takeover. Moreover, talk in the market on a possible takeover may drive the stock upwards.

Bernstein’s View on Valuation:

RIM’s recent valuation is pricing in a solid failure of the company’s current strategy

First, RIM trades at 2.8x the cash stream from its service fee in the last 12 months. Even on our numbers, a buyer paying a 50% premium would pay-back 62% of its investment with the cash RIM can generate in the next 3 years from the service fee it charges monthly per user, mostly from a slow moving corporate user base. If the market gives limited credit to the sustainability of RIM’s free-cash flow, it is unlikely that, if properly managed, RIM’s service revenues will phase out in less than 3 years. This presents, without a doubt, a strong valuation support for any activist investor or trade buyer  Today’svaluation therefore prices-in a collapse of devices sales that is far worse than our already pessimistic forecast.

I guess to sum up something has to give here and I am willing to commit a certain amount of capital that the management comes to the senses and looks to restore some shareholder value, if they don’t soon the stock is Toast.


Update Nov 18th, 2011:  Since putting this trade on last Friday, RIMM has had an interesting week.  The stock was up almost 9% at one point on the heels of a Goldman Sach’s upgrade from a Sell to Neutral.  Funny thing is about the upgrade they actually lowered their price target from $22 to 18.00 below where the stock was trading at the time and leave their below consensus estimates on the stock.  Now I wouldn’t go and get all excited about the upgrade as the analyst is essentially doing a victory lap, since downgrading the stock on April 1st the stock is down 72% and my sense he no longer sees the risk reward of his Sell rating……..Since the gap higher on the on the upgrade the stock has given back all of those gains and now sits almost exactly where it started the week.

6 day chart of RIMM from Bloomberg


Excerpts from Goldman Sachs Upgrade not to clients on Nov 16th, 2011:

We are upgrading RIM to Neutral from Sell, as we believe the stock’s discount valuation at a P/E of 3.8X our below-consensus CY12 EPS estimate already fairly captures our fundamental concerns.

Our sum-of-the-parts valuation assigns value to three of RIM’s assets: (1) its intellectual property (IP), (2) its Services cash flow stream, and (3) its cash. We value RIM’s IP portfolio at around $3.4 bn, including $778 mn for the Nortel IP assets it bought in June of this year, and an assigned value of $458k/patent for its remaining 5,680 patents, based on the average value per patent of comparable IP portfolios that have either recently sold or are publicly traded (Motorola Mobility, Nortel and IDCC).

We estimate the net present value of RIM’s Services cash flows at $4.8 bn, assuming they go to 0 in 6 years as carriers walk away from revenue share contracts, given they do not have such contracts with other smartphone vendors. We also include RIM’s $1.4 bn in cash and investments. In total, this implies a value of $9.6 bn, consistent with the stock’s current market cap.

There is no change to our estimates, which remain 9% below the Street for FY13 (Feb) and 23% below for FY14 on continued market share losses and expected declines in the Services business. The primary upside risks include attractive product cycles, stabilizing market share in the US, stronger international growth, or activist involvement that precipitates management change and a restructuring. The primary downside risks include continued market share decline and a faster-than-expected decline in service revenues.


Funny thing to me is that Upgrade note read like a downgrade note.  My view hasn’t changed, THESE GUYS ARE SCREWED.  They are losing mind-share in the mobile space with every waking moment, they need to do something dramatic and say the words “WE ARE EXPLORING STRATEGIC ALTERNATIVES”.   If they do this they buy themselves some more time….The only way to play the stock from the long side is with options.  There is a definite risk that with inaction on the strategic side and with continued poor operating performance that the stock has another leg down when they report in mid December.

That being said, if they do get focused on saving their company the stock could prob go to the mid 20s as it is SO cheap, sentiment SO bad and shorts keep pressing.

I am going to tweak my trade from last week and leg out of the fly.  I am going to now:

BUY back one of the Dec 22.5 Calls back that I am short in the Guts of the call fly and Selling 1 Dec 25 call at .31, (bought the Dec 22.5/25 call spread) leave my self Long 1 dec 20, Short 1 Dec 22.5. (long dec 20/22.5 call spread).

Again this is a contrarian play and unless they beat and raise, announce they have hired bankers to explore strategic alternatives or have some other trick up their sleeve this thing probably heads lower in a final sort of hate sale by holders who just can’t take the pain any longer.

SO to refresh, My new position looks like this:

Long RIMM DEC 20/22.5 call spread for ~.63

-Long 1 Dec 20 Call

-Short 1 Dec 22.5 Call

Cost about .63

Break-even on Dec Expiration:

profits btwn 20.63 and 22.50, make up to 1.87, max gain above 22.5 make full 1.87

Losses btwn 20 and 20.63 lose up to .63 and max loss of .63, 20 or below.

Reason for this is if it is a long shot then I want to put the odds of a buy out or a big announcement

Original Trade Nov 11th, 2011:  RIMM: Is Sentiment So Bad That It Could Be Good For the Stock Near Term?

New Thoughts: RIMM has gotten a lot of press of late as it is trading at 5 year lows and below its book value.  The company has failed to win over consumers with its new phones or tablets and is miserably losing their monopoly among their installed base in the enterprise. One of the final nails in the coffin for these guys is that large banks, in an effort to cut costs, are starting to let their employees access their work email over their own personal devices through a company issued VPN….these personal devices are more often than not iPhones. This company has lost almost every recent battle and it feels like they are not far off from losing the war.

I have been extremely negative on the name (see some previous comments/trades below) over the last year and have had a few very profitable short trades over this time…..with sentiment as bad as it is though, there could be an opportunity near term on the long side. Short interest keeps edging up, now almost 10% of the float, the Street has absolutely abandoned their once overwhelmingly positive stance, now with only 8 Buys, 25 Holds and 19 Sells.

I think this company’s management, products and strategy absolutely suck, and I do think that if the company misses and guides lower when they report their Fiscal Q3 on Dec 15 that there is the risk of another leg down as we saw in NFLX last month……just when people thought it couldn’t go any lower it gets crushed…..again.   BUT if the company were ever able to come in or beat very low expectations and actually give credible, believable forward guidance the stock could rocket back up to the low to mid 20s.   Also, given the rock bottom valuation and some untapped value this company could very quickly become the focus of activist investors, and I don’t mean the Canadian type, I mean the rip your face off U.S. types like Ichan, Einhorn and Loeb. ( I have no knowledge that any of them are interested) So here are the trades:

2 Trades look interesting to me in Dec expiration isolating their Dec 15th earnings report…PLUS one very speculative Take out trade in FEB……

 1st TRADE: Low Premium, low risk, potential high reward, but have to get a lot of things right.…...stock ref 18.20 Bought DEC 20/22.5/25 Call Fly for .30

-Bought 1 Dec 20 call for 1.40

-Sold 2 Dec 22.5 calls for a total of 1.60(.80 each)

-Bought 1 Dec 25 call for .50

Break-Even on Dec Expiration:

Profits btwn 20.30 and 24.70 up to 2.20, max gain 2.20 at 22.50,

Losses btwn 20.00 and 20.30 of up to .30, btwn 24.70 and 25 up to .30 and max loss of .30 below 20.00 and above 25.00

1st TRADE RATIONALE: I like this trade because it offers about a 7  to 1 pay out if the stock  rallies about 20% btwn now and dec expiration.  That would normally seem like a fairly sizable move in such a short period of time, but the stock is down 68% ytd and has moved about 13% following the last 4 qtrs earnings.  Your max loss is the .30 in premium that you paid.  Now again, Flys can be expensive to trade and unmanageable, but if you believe as I do that the sentiment might have gotten just a little too negtive than this is a low premium defined risk way to play around a catalyst.

BY no means do I have any edge as to what the company is likely to report and by all accounts the direction of their business is not going in the right way….I still believe that they will not be a stand alone entity in a year, but from what depressed stock level will management finally come to this revelation.

2nd Trade: stock ref 18.20 BUY DEC 20 / 24 Call Spread for .85

-Buy 1 Dec 20 Call for 1.44

-Sell 1 Dec 24 Call at .61

Break-Even On Dec Expiration:

profits btwn 20.85 and 24 make up to 3.15, max gain at 24 or above make full 3.15 or 4x your money.

loses  btwn 20.00 and 20.85 lose up to .85 and max loss 20 or below lose .80 ~4% of the underlying.

2nd TRADE RATIONALE: I have less conviction is this largely because what looks like a fairly heft premium outlay while playing for such a large move for the max gain, which is up about 30% at 24.  You would only do this if you thought there was a good chance that the company put themselves up for sale or was likely to be bought or undertake some strategic partnership that could catalyze the stock higher.


3rd TRADE: TAKE OUT RIMM 18.30 Buy FEB12 25/30 Call Spread for .60

-Buy 1 Feb12 25 call for 1.10

-Sell 1 Feb12 30 call at .50

Break-Even on Feb12 Expiration:

profits btwn 25.60 and 30 make up to 4.40 above 30 make full 4.40

Losses btwn 25.60 and 25.00 lose up to .60, below 15 lose full .60

3rd TRADE RATIONALE:  you would only buy this call spread if you thought that possibly the company puts themselves up for sale soon and that they would see some bids in the new year.  This is high speculative, but there is no doubt the company could see a premium of about 50% which could see the stock in the high 20s….also with a market cap of only ~$10bln this would not be a difficult acquisition for a few different strategic buyers and I wouldn’t rule out a venture back play.


-Technically the stock is extremely oversold and with sentiment so bad and expectations so low the stock could act like a coiled spring on the least bit of good news.

[caption id="attachment_6116" align="aligncenter" width="300" caption="1 yr RIMM chart from Bloomberg"][/caption]



Update Sept 15th, 2011:  Since putting this trade on last week the stock has essentially gone sideways (down 2.5%)…..there is a good bit of skepticism as you would expect heading into the quarter and I wonder at this point if  it all too obvious.  EARNINGS ARE TONIGHT AFTER THE CLOSE :I am convinced that this company is screwed as a stand alone, but with their mere $15bil market cap I wonder who could swoop in and buy them for their patents which they spent a lot of time and energy defending most of the 2000s and their installed base……heck GOOG paid a massive premium worth $12.5billion for MMI, someone could clearly pay $25bill for RIMM.

The Sept 29/24 Put Spread that I bought last week for 1.00 is now worth 1.30 and I am going to sell it here and roll into a further out of the money, lower probability play into earnings.

NEW TRADE: I am going to take the .30 profit and now buy the Sept 27.50/25 Put Spread for .60 (RIMM 29.60)  My break-even on tomorrow’s expiration is 26.90 on the downside and bwtn 26.90 and 25 I can make up to 1.90.   AT this point I have no clue what sort of guidance they will give and frankly don’t believe this man

agement one way or the other, so I want to risk less to make a bet that they will guide down.

Original Post Sept 9th 2011: RIMM: Report FYQ2 Next Week, Unless they Say “Exploring Strategic Alternatives” the Stock is Going Lower

Next Thurs, Sept 15th after the close, RIMM will report their Fiscal Q2.  The options market is implying about a 10.5% move vs the 4 qtr average move of about 10%….

I want to make a defined short play into the event………[private]

TRADE: RIMM $30.46 Buy Sept 29/ 24 Put Spread for 1.00

-Buy Sept 29 put for 1.25

-Sell Sept 24 Put at .25

Break-Even on Sept Expiration:

Profits: btwn 28.00 and 24 make up to 4.00, below 24 make full 4.00

Loses: btwn 28.00 and 29 lose up to 1.00, above 29 lose full 1.00

TRADE RATIONALE:  Stock has rallied 33% off of the summer lows and I have to think any incrementally better news is in the stock.  The company is going the way of Palm or NOK, it is unavoidable.  Unless they say we are “exploring strategic options” as been urged by a few large shareholders no one will believe their guidance.  Their products suck and their management and strategy are worse.  Their patents maybe worth something but I don;t think we will see a MMI sort of deal if a buyer just wants the patents, why own the declining asset of the handset business.

Technicals: Chart has a ton on air above current levels and given the recent run a good bit of enthusiasm on a short term basis.

[caption id="attachment_4581" align="aligncenter" width="300" caption="1 Yr RIMM chart from Bloomberg"][/caption]


Generally I am not in the business of pressing shorts, but to me this is a terminal short and I want to make short term, catalyst based defined bets.  I am risking what I am willing to lose and I like the 5 to 1 payout potential of the vertical spread….won’t take much on the downside to break-even given the stocks recent run.

RISKS TO THE TRADE:  There has always been the takeover speculation since the stock broke last year, and in an irrational market like we are in today, companies fighting for relevance can and will do dumb acquisitions (see MSFT for Skype and GOOG for MMI).   RIMM is very cheap on a valuation basis, but then again so was NOK and MOT the whole way down.

The Playbook tablet was likely a dud and if there is any good news on this front it probably has to do with some funky games the company plays by stuffing their selling channels rather than actually selling to end users…..

As for new products in the qtr they where obviously all evolutionary, not revolutionary.  iPhone 5 push out could have helped them a bit at AT&T and VZ as the life-cycle of the iPhone4 was getting old….

I guess my final take is that any good news on the margins or revenue re-acceleration I just don’t buy and would be a very near term phenomenon.  The company needs to spend a ton more on R&D to be at all relevant…..So unless they say they are dropping their OS for Android, or they are exploring strategic alternatives I think we could see a sell off back to mid 20s post any disappointing results or guidance.