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RIMM: Time to Buy This Turnaround Stock?

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The following is a sample report of Sean's TechStrat Report.

Why is Research In Motion (NASDAQ:RIMM) down after what looked like a really good quarter? And, folks, this was a surprisingly strong quarter for RIMM with the company increasing its net cash position by over $600 million to roughly $2.9 billion. The cash balance was at $2 billion just two quarters ago and most expected it to decline in the next two quarters vs. rising nearly 50%, but more on that below.
First of all, I think the Citi analyst summed up why the stock reversed AHs and is weaker today. "Citigroup notes Research In Motion shares sold off last night after it became clear on the earnings conference call that RIMM will receive much lower rates on its highly profitable services. Citi says Research In Motion's services will materially and structurally shift lower with the new BB10 products."
Okay, first I want to address the statement of "much lower rates." That is conjecture. Right now, we don't know if the rates will be "much lower" on the whole. For select clients, they could be much lower, but for the largest enterprise entities using the full suite of RIMM's services, they might not change much -- heck, they could increase.  
But the point here is that we don't know, and that uncertainty turned a huge short-covering rally back into a short in many eyes and thus Citi is correct on the selloff.  
So where are we now? I have used the weakness in the report to add shares (12.75 in AHs and will be looking to cautiously scale further). Why am I buying? Because what I see is a very substantial potential turn around in the sales of BB10 devices. And I've already seen that the company can very materially increase its financial health.  
Not too many companies can increase their net cash position by 50% while suffering what many think are "conditions that could/will end the company." Moreover, I've been hoping for a pullback into this latest run as I've done my product evaluation work on BB10 and, folks, it's good. My readers should be well-versed now in terms of me calling shifts in product share -- see my views on the initial iPhone (NASDAQ:AAPL), my Android (NASDAQ:GOOG) smartphone call, and the Android Tablet share call among others.  
In details, their contact management features are potentially game-changing; the poor browser is fixed; and bottom line, it's good enough for enterprises to buy for the workers again. Will the company take share from Android/iOS with the consumer? Really, I don't think so, not in any material way.  
However -- and here is the key -- RIMM doesn't need to gain share for the stock to work and work well. It just needs to first stabilize. RIMM is also not a PALM. PALM never had 80 million pretty faithful subscribers. RIMM only needs 15 million to 18 million in sales of the BB10 to reach break-even for the year. Most analysts are using that 18 million number, where I'm closer to the 15 million to 16 million number. But the best way to think about it is this: Can RIMM sell the BB10 to just a quarter of its subscriber base in a full year (or 20 million units)?
My view is that it not only will sell the BB10 to a quarter of subscribers in a year, but it will get those sales in just three quarters. Thus if RIMM sells more like 22 27 million units, the company will be printing pretty strong profits. Currently the analysts see RIMM losing $.50 for the next FY or the first full year of BB10 sales. As stated above, if RIMM can get to 18 million-plus, I think it will make a decent amount of money. My conservative estimate is $.50 and my upside number is $1.50. Either way, that's a lot more than what the analysts currently have in the numbers.  
Bottom line: I feel that we will see a renewed ramp on BB10 sales and thus I now think the "old" RIMM sum of parts valuation work in the $18-24 range is back in play. Moreover, with the morning decline, the stock is trading at just 2X net cash and the company stated that it is laser-focused on not burning too much of the new cash even as it will ramp up market efforts for the BB10 launch. So while I freely admit I was a bit early last night adding a tranche in the $12.70s, I think that's a good place to start adding tranches. I will now look to scale further and will get quite a bit more aggressive if I see the shares closer to $10 or below. Right now, I'm thinking the next tranche could be in the $10.80-11.40 area.   
The "other" bottom line: I think far too much is being made of this service fee issue, but that is logic. At times, RIMM doesn't trade with any measure of logic. This has been true on the upside in years past and with the landmark lows just a few weeks back. The last thought I have is that I think the cash generation and BB10 momentum (and there is emerging momentum for this platform) will have the RIMM M&A rumors fueling up again. Right now, that value would be in my $18-24 range, but if we saw just one good quarter of BB10 sales, the range could jump immensely. If I had to make a New Year's prediction right now, I'd say RIMM sees at least one bid in the $30s in 2013 and the likely buyer would be Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), or Samsung (PINK:SSNLF).  

Twitter: @UdallTechStrat

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POSITION:  rimm, msft