GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

3 Reasons to Avoid Research In Motion (RIMM)

September 20, 2011 | About:
matsandalex

matsandalex

9 followers
We previously highlighted Prem Watsa’s questionable investment in Research In Motion (RIMM) a few months ago and it appears that Mr. Market agrees with our view. Last week RIMM was hammered for 20% after it announced horrific results.

First of all, net income was only $419 million, or 80 cents per share compared to earnings of $797 million or $1.46 per share, in the same quarter the previous year. Analysts expected 90 cents per share. The 62% shortfall in profits shows how quickly a tech company can fall from grace.

More startlingly, BlackBerry shipments during the second quarter were way below expectations. RIMM shipped about 10.6 million units, dramatically below the forecast of 11-12 million units. The Playbook tablet shipments were an absolute disaster at about 200,000 units shipped. Playbook has been an embarrassing product launch for co-CEO Jim Balsillie who called the Playbook a "game changer" a year ago. At the time he said, "I can't think of anything more architecturally game-changing that we've done, other than the launch of the original Blackberry.”

However, other analysts quickly recognized that the RIMM Playbook was a flop.

Watsa tripled his position in the summer months ahead of RIMM’s disastrous results. As of July 1, 2011, RIMM was the fifth largest position at the company and 8% of the portfolio. The bludgeoning of RIMM shares resulted in at least $40 million of paper losses for Watsa and Fairfax Financial.

The investment community is rapidly concerned with RIMM’s cash flow. In other words, how is the company going to convert inventory into cash given that demand for the product is tepid at best?

The core problem is research and development spending. In short, the company must continue to fund billions of R&D to keep up with rivals like Google (GOOG) and Apple (Apple). However, there is hesitation that the R&D will pay off because the brand has been tarnished in recent months.

It is conceivable that the RIMM subscriber base has peaked at 70 million which means that service revenue will be a further drag on profitability in the coming year.

Rating: 2.7/5 (9 votes)

Comments

sweetcity
Sweetcity - 2 years ago
When Jimbo steps down as Co CEO watch this jump 25%. Too much break up value with the patents etc to go much lower.
jdleon
Jdleon - 2 years ago
1 simple reason rimm is goner:

In a mature market, only 3 major players can survivied: iOS, Android, WinPhone

there is no room for palm, nokia, rim,

example:

car: gm, ford, chrysler

search engine: google, bing, yahoo

plane: boing, bombardier, airbus

shoes: nike, adidas, puma

tire: Michelin, goodyear, hancok

etc
augustabound
Augustabound - 2 years ago
1 simple reason rimm is goner:

In a mature market, only 3 major players can survivied: iOS, Android, WinPhone

there is no room for palm, nokia, rim,

example:

car: gm, ford, chrysler

search engine: google, bing, yahoo

plane: boing, bombardier, airbus

shoes: nike, adidas, puma

tire: Michelin, goodyear, hancok

etc



I don't understand your reference here.

What about Toyota, Honda and Nissan? What about Embraer, Reebok, New Balance, Bridgestone, Toyo?

Industry dynamics aren't the same across the board, some have room for multiple players and others just a couple. RIM has fallen behind because the group is moving faster than they are and like most tech situations, the switching cost is obviously low. They don't have a moat.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide