New Trade: Playing Above the RIMM

by Dan March 30, 2012 12:49 pm • Commentary

Here is a preview of what I will be discussing tonight on Options Action on CNBC at 5pm est:

RIMM reported a much anticipated fiscal Q4 last night that missed fairly dour expectations and stated that they will not be offering “quantitative” guidance anymore, rather it will be more “qualitative”.  Sounds a bit fishy to me, when investors and Wall Street are most skeptical, the new management decides to be less transparent.

I am not gonna go into great detail on the quarter and the new strategy, Barron’s did a fairly decent wrap of the conference call here , but I guess one of the only reasons you would buy the stock here is if you felt that new CEO Heins comment that “it would be Prudent to explore all options” means that they are open to a sale.  Details of potential partnerships remain vague, and the following comment from the CEO in the press release doesn’t shed a whole heck of a lot of light on what could be in store, “We are undertaking a comprehensive review of strategic opportunities including partnerships and joint ventures, licensing, and other ways to leverage RIM’s assets and maximize value for our stakeholders.”

The stock is ACTIVIST BAIT, recently 13f filings revealed that David Einhorn’s Greenlight Capital took a close to 3 million share stake in the company.  When we get Q1 13f disclosures in mid May, I would expect to see increased Hedge Fund ownership, and I would assume that most activist investors think there is a sense of urgency here, even if it doesn’t appear that management does.  I also think there is a very good chance that this situation resolves itself sometime in the second half of 2012, with the company being forced into a deal by activist investors, not the friendly Canadian kind, But rip your face off Third Point Capital kind.

I am not sure in the near term there is a ton of downside as investors wait for new phones based on the companies new operating systems, but I do think this stock could languish until investors start to make some noise.  But once the news starts in earnest, the stock could very well be back in the high teens.  With a $7.5 billion market cap, and $1.7billion in cash, this is not exactly a hard acquisition for most competitors looking to leap frog peers in the smartphone space in a market share game. Remember that GOOG paid $12.5b for MMI (ex their $3.5b cash), now this was primarily for MMI’s patent portfolio, but if anyone could place a value on some of RIMM’s hard fought parents from last decade then maybe the thing looks that much cheaper.  Business Insider had a nice little rundown today of some prospective buyers (here).

In my years in this business, AAPL is really the only end market tech company that I have seen turn things around from the brink, and given RIMM”s history of lack of innovation I wouldn’t place any serious bet on a turnaround any time soon.  The company’s value will be in what a larger competitor can squeeze our of them, not for them to create an iPhone killer.

In my normal sort of contrarian way, I would much rather play for a takeout then a meltdown, it’s just more fun at this point.  I wouldn’t exactly buy the stock but I like the risk/reward of an out of the money call spread that would place a purchase price in the mid to high 20s.

TRADE: RIMM 14.33 Bought the Jan13 20 / 27.50 Call Spread for .75

-Bought 1 Jan 20 Call for 1.08

-Sold 1 Jan 27.50 Call at .33

Break-Even on Jan13 Expiration:

Profits btwn 20.75 and 27.50 make up to 6.75, max gain of 6.75 above 27.50

Losses of up to .75 btwn 20.00 and 20.75, with max loss of .75, 20.00 or below


Technically the chart is like a coiled spring, and the least bit of Good news and I think you have a stock in the high teens and then you would probably see a take out value of somewhere near $15billion, which would put the stock near $27.50

1 YR RIMM Chart from Bloomberg


Sanford Bernstein analyst Pierre Feragu (rates the stock Neutral with $12 target) made the following arguments about the value of the company’s asset to the right buyer in a note to clients dated March 13th:

RIM’s 75m users are worth more than the company’s market capitalisation. RIM is currently valued at only ~$90 per user- less than half HTC’s ~$280 per user. Many companies could see substantial value in this asset. As a couple of illustrations only, without expressing any opinion on the likelihood of such moves, a Microsoft could consider such an acquisition and invest another few hundreds of dollars per user in offering replacement phones based on their operating system, retaining the Blackberry email experience and the popular BBM service. This would potentially quintuple Window’s current smartphone user base.

RIM’s market share would be a king maker in the consolidation of the smartphone space. A number of smartphone players could see RIM’s current market share as a key strategic asset. Not only is RIM in command of 11% of shipments, or almost half the market leader, but also RIM has an even larger share of users, having been in the business for much longer than most competitors. Moreover, RIM’s user base is of very high quality with a dominant share of corporate users. Microsoft could see RIM’s 10% share as a bridgehead from which to attack the rest of the smartphone market. HTC could add RIM’s 10% onto its existing 11% share, quickly reaching the scale of Samsung and Apple. Any of the latter two could leapfrog its closest contender with such an acquisition

A “buy an upgrade” acquisition is eminently viable. An acquisition by a trade buyer with an existing smartphone platform makes a lot of sense to us. We estimate a trade buyer would extract $18bn of value from the acquisition, cumulating a decent IP portfolio, the cash cow of existing service fees and the strategic value of RIM’s user base. This is a 100% premium to the recent stock price. Although we see this as a clear upside risk, we don’t see any likely contender yet. Microsoft has often expressed unease with the idea of investing into hardware; Apple and Samsung are likely too busy managing their ongoing success and HTC wouldn’t have the financial strength to carry out such an operation. Time is of essence as well. All 3 assets will see their value decline rapidly over time. IP valuations are likely to come down, as the “Patent Wars” settles, RIM’s service revenues are likely to shrink rapidly, as the company’s user base decreases. This is the reason why we do not recommend investors to buy RIM as a long term value play.