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The Anatomy of a Tech Giant's Fall From Grace: Research in Motion's Problems Are Far From Over

Reggie Middleton's picture





 

Research in Motion has been one of the most successful tech shorts of this blog's history (thus far). We first recommended a short last year and reiterated it in the fist quarter of this year. Reference:

  1. BoomBustBlog Research Performs a RIM Job!

  2. BoomBustBlog's Fundamental/Forensic Analysis of Research in Motion Has Returned 2x-3x Original Investment This Year!!

 This is a snapshot of RIMM as of the writing of this article...

image002

As you can see, the results have been spectacular, particular if well timed puts have been put to use. In January I posted:

I personally see a clear leader in mobile computing becoming visible in 2012. Using options, a minimum of 2012 expiration OTM and ATM contracts can be purchase at the most optimistic break points demarcated by the model above after being populated with assumptions you feel most valid. I will have a proprietary BoomBustBlog option model available for download to paying subscribers by the end of next week, at which time we will revisit the analysis above.

A 50% drop in price later... On that note, Bloomberg reports: RIM to Cut 2,000 Jobs as BlackBerry Loses Share to IPhone

Research In Motion Ltd., maker of the BlackBerry smartphone, plans to cut 2,000 jobs, or about a tenth of its workforce, as sales slow amid market share losses to Apple Inc.’s iPhone.

The reductions, across all functions, are part of a plan to “focus on areas that offer the highest growth opportunities,” RIM said today in a statement. The job cuts will leave the Waterloo, Ontario-based company with about 17,000 employees.

RIM predicted last month that sales this quarter may drop for the first time in nine years. The company is losing market share in the U.S. to the iPhone and handsets running Google Inc.’s Android software, in part because it hasn’t introduced a major new BlackBerry model since August. Cheaper Google phones are also making inroads in Latin America, Asia and Europe, threatening the popularity of less expensive BlackBerry models like the Curve.

... RIM fell 85 cents, or 3.1 percent, to $27.06 at 10:26 a.m. New York time in Nasdaq Stock Market trading. The stock had dropped 52 percent this year before today.

The headline grossly mischaracterizes RIM's problems. Google's Android has, by far, inflicted much more damage to RIM than Apple ever has. This was easily seen over 13 months ago, at least by BoomBust Bloggers, referencing BoomBustBlog Research Performs a RIM Job!...

Page 5 of our Research in Motion forensic analysis (released in the summer of 2010 - File Icon RIMM Forensic Analysis and Valuation – Professional & Institutional or File Icon RIMM Forensic Analysis and Valuation – Retail) clearly stated that while we expected RIMM’s handset shipments to rise as a result of a rapidly expanding smartphone market, it will lose considerable market share....

As it turns out, it appears that we were erred slightly to the optimistic side with an 18% market share estimate for 2010. By the end of the 3rd quarter, RIM has fallen to 15.3% according to information calculated from IDC, and its decent has accelerated far faster than even we (the bears) have anticipated – a full 350 basis points for the quarter. This is 6x the decent of last quarter and 7 x the decent of the quarter before that. It is quite safe to assume that they will be materially below this point at year end (the data that we crunch is lagged by a quarter). This market share loss is most assuredly caused by the outsized growth of Android, which I will demonstrate in a minute. Below are charts generated from an updated version of the subscriber document File Icon Smartphone Market Model – Blog Download Version:

As you can see above, for the full year of 2010 RIM has trailed smartphone market penetration growth and that trail has increased each and every quarter with the rate of decent rapidly increasing.

RIM’s share price has benefited from an increasing equity market as well as the announcement of new products. The Torch, although possessive of redeeming new qualities, is essentially still a generation behind Apple and 1.5 generations behind Android. See RIM Smart Phone Market Share, RIP?

Research in Motion is following the EXACT path we at BoomBustBlog had laid out for it since the 3rd quarter of 2010.

This story is far from over, primarily because we are just entering the chapter in which Android does what it does best, and that is compress margins. Due to the unique open source component of the Androd business model, it actually slashes prices and spikes the technology bar both simultaneously and quite rapidly. So rapidly that not only is it without precedent, but literally tramples all over Moore's law.

Moore's law describes a long-term trend in the history of computing hardware. The number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years.[1] This trend has continued for more than half a century and is expected to continue until 2015 or 2020 or later.[2]

The capabilities of many digital electronic devices are strongly linked to Moore's law: processing speed, memory capacity, sensors and even the number and size of pixels in digital cameras.[3] All of these are improving at (roughly) exponential rates as well (see Other formulations and similar laws). This exponential improvement has dramatically enhanced the impact of digital electronics in nearly every segment of the world economy.[4] Moore's law describes a driving force of technological and social change in the late 20th and early 21st centuries.[5][6]

The law is named after Intel co-founder Gordon E. Moore, who described the trend in his 1965 paper.[7][8][9] The paper noted that the number of components in integrated circuits had doubled every year from the invention of the integrated circuit in 1958 until 1965 and predicted that the trend would continue "for at least ten years".[10] His prediction has proved to be uncannily accurate, in part because the law is now used in the semiconductor industry to guide long-term planning and to set targets for research and development.[11]

It is safe to say that Android chops the half-time to obselence implied by Moore's law by at least 50%, with a doubling of capabilities happening annually, and arguably even every two quarters. This has not gone unnoticed by those who are paying attention. The truly remarkable feat is that prices are simultaneously dropping towards zero out of pocket cost to the consumer. How does RIMM compete with that? Well, the same way all of Android's other competitos will if Android isn't significantly slowed down - again from Bloomberg's article:

‘Margin Pressure’

“Thorsten, with his Siemens background, is known as somebody who is exceptionally operationally efficient,” Shah said. “That’s a positive for the upcoming margin pressure that is likely.

You see, Bloomberg didn't go into detail regarding this phenomena, but luckily BoomBustBlog did more than just a little detail on the margin compression thesis, and for good reason. This will be the theme that will drive this industry to produce unprecendented functionality for the retail consumer and entperprise alike while simultanesouly putting those who can't compete at light speed with decreasing margins out back to the wood shed, metaphorically speaking, of course:

Those that chose to follow this short recommendation had plenty of tools to assist in the decision making:

RIM Model Assumptions

RIM Model Factors Driving Growth

After populating the assumptions tab, jump to the “Factors Driving Growth” tab and choose the player whose market share and penetration data you want to populate the valuation model for the sake of comparison. The choices are “Nokia”, “RIMM”, “Apple”, “HTC” and “Others”. This tab is annual data only.

RIM Model Quarterly Factors (driving growth)

On the next tab, you can do the same as the previous (this tab is quarterly growth). Each of the growth tabs has charts that are print and presentation quality. Just be sure to tell everyone where you got thesis, data and analysis from :-) .

Other tabs in the model…

RIM Model Income Statement

RIM Model Device Market Analysis

RIM Model Revenue Analysis

RIM Model Device Revenues

Valuation and Multivariate Scenario Output

Final output is RIMM’s valuation using our analytics and your assumptions as input in the assumption tab above, as well as a multivariate scenario analysis showing changes in quite a number of variables (assuming all others remain the same) and their effects on your base valuation, as well as the percentage upside/downside from the current price.

 


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Tue, 07/26/2011 - 13:20 | Link to Comment Fat Ass
Fat Ass's picture

Good grief.  It's so embarassing seeing Reggie trying to talk out of the Apple Catastrophe (aka the "Reggie loves the Android Interface" fiasco).

First there was the "I didn't actually say that."

Then there was the (bizarre) "That wasn't actual advice, um, paywall something something !"

Now there is the gibberish above.

it's really sad.

As has been said endlessly by many commentors here: it's just so sad to see an otherwise very wise newsletter tout, gabble on about something he knows nothing about.

BUT WAIT -- a new addendum from Reggie above.  "Eventually Apple price will go down - maybe in a year or two.  And then, you'll all see how right I was."

Sad isn't it?

Tue, 07/26/2011 - 12:22 | Link to Comment Sutton
Sutton's picture

I love the BB keyboard.

Must have for me.

But I'm a real man, not some hipster Apple fag.

Tue, 07/26/2011 - 11:39 | Link to Comment bill1102inf
bill1102inf's picture

iphones touch screen is 10000000x better than the 'keypad' , grow up

Tue, 07/26/2011 - 11:31 | Link to Comment escargot
escargot's picture

The only reason RIM hasn't fallen quicker is because they had such a large share of the market to begin with.  The people running that company just don't get it.  The web browser sucks, plain and simple.  As much as I like my BB for the keypad (I hate the touch-screens), I'm planning on ditching it eventually because the video playback is maddening and browsing is practically impossible.  I sold at 72.  Too bad I bought at 78.  DOH!

Tue, 07/26/2011 - 11:04 | Link to Comment I am a Man I am...
Tue, 07/26/2011 - 11:42 | Link to Comment Reggie Middleton
Reggie Middleton's picture

The have been 3 or 4 commenters with similar comments. It is perspectives such as yours that will make Apple such a good short when the time comes. You see, you TOTA?LY ignore facts and run purely on emotion and dedication to Apple. Thus far Apple has peformed precisely as I said it would, including last quarte wher I said the sell side will low ball and I came in with closer esti,ates as Apple blows past inept estimates. 

Apple has lost market shar to Android precisely as I said it would, and has gottenmore aggressive for business, precisely as I said it would. 

i said they will suffer from margin compression and it should become apparent in 4-6 quartes.

I was not short Apple last year and speculated a little this year for aa small gain.

if there is no additional sign of my knowing what I am talking about besides success with RIM, Google, market share forecasts, the fate of Nokia, Apple trends (obviously thatnis not enough for those who ignore facts and reality), then come see me in the 3rd quarte of next year to see if i was wrong, once.

You Apple fanatics, combined with the fact that every fund in the world is stuffed tomthe gills with this stuff willnset upnthe sjort of the lifetime when its time to get out of the position from the long side.

Tue, 07/26/2011 - 14:14 | Link to Comment Dburn
Dburn's picture

What emotion? I look at at a clean balance sheet with increasing gross margins on the Income statement. 77B in cash is a weapon in the right hands and it is in the right hands. Apple won a broad patent on smart phone and iPad tech and successfully sued HTC which makes the most smart phones of any manufacturer for infringing on two if it's patents. The damages have yet to be determined but  you can bet that there will be a substantial revenue stream from licensing as management at Apple knows they can't sell everyone, but they will make it significantly less attractive for smart phone makers.

You have been doing beautifully in the areas of expertise you have in real estate. I loved that video you had /picture gallery of the unsold condo glut in NYC. But, Tech is a whole different animal. There are assets that can't be quantified on a balance sheet. No matter how much you try to quantify why Apple will lose and it will be the greatest short...uh...in time, you have been consistently wrong every time. Your rush to judgement each time the stock dipped was quickly stuffed when the stock made new highs, not because of emotion but as a result of hyper growth in revenue, gross margins, cash and net margins. Pull the company name and it's CEO out and apply the same standards to a Fortune 500 company and tell me you would be  shorting it.

Admit you have been wrong and will continue to be until your not and people will think much more highly of you. No one ever is right 100% of the time and as you should well know, timing is everything in the market. If they eventually turn into a flat return stock like WalMart or even Microsoft you still would be able to say you were right. Get over it and start running some columns on the topics we depend on you for and stop with your ego driven emotional involvement of Apple.

How about big Pharma who has a record amount of blockbusters going off patent in the next year or two? I checked the charts on sales and revenue of products that go off patent and no one buys the drug for it's brand name. There is a trillion dollars worth of market cap between the majors . Apply some of your expertise there.

Tue, 07/26/2011 - 12:36 | Link to Comment williambanzai7
williambanzai7's picture

With all due respect Reggie, I think some of us have been following Google and APPL a little bit longer than your posting history on the subject.

I for one can remember being told I was foolish for thinking Apple was a buy back in 2002. And that was just the hardware I was talking about.

I can also recall asking my IT people to put my phone on the network in 2008, long before Android was little more than a pipe dream.

If Android is making inroads against Rim it is because iPhone exposed the blackberry for the glorified paging system that it is.

Tue, 07/26/2011 - 12:26 | Link to Comment hannah
hannah's picture

RIM and AAPL have been the tools the fed/banks use to pump the market...forget market fundamentals. all the 'good' for both these companies has been thru gov intervention. apple isnt selling macs...they are selling 'every ipad they can make'....yes...to the government thru schools.

AAPL is BS and RIM with its channel stuffing has been BS for years. at least the apple products work most of the time but still are way over priced for todays economy.

Tue, 07/26/2011 - 12:03 | Link to Comment taraxias
taraxias's picture

awesome post 

Tue, 07/26/2011 - 10:54 | Link to Comment poggi
poggi's picture

When corporate dudes and dudettes were carrying a BB paid for the by enterprise and an iPhone paid for out of pocket, RIM should have got the message and tried to be the "one" phone.  Too late.

Tue, 07/26/2011 - 10:47 | Link to Comment chrispycrunch
chrispycrunch's picture

RIM really ought to get more competitive in the consumer space, and offer a more compelling deal than its competitors. They can't sell a torch for a premium price because the device is slower and buggier.

 

What they should do is offer combo deals and take on the mid-market. Given the choice between having blackberry and BBM for the family at a more reasonable monthly than a data-guzzling smartphone from iphone or android, many would opt for the first option. Thing is, that family option ain't there so RIM will just see its market share erode in the U.S.

Tue, 07/26/2011 - 10:40 | Link to Comment Pinto Currency
Pinto Currency's picture

CNBC and every major media joint have been screaming about RIMM for the past 9 months.

With RIMM having their own frequencies in the world's major markets and the most secure information transmission is a valuable strategic asset - and impossible for the competition to emulate now.

With 41 million subscribers (up 64% y/y) they are still formidable players. 

Let's watch this one play out. 

 

Tue, 07/26/2011 - 10:39 | Link to Comment oddjob
Tue, 07/26/2011 - 09:58 | Link to Comment cosmictrainwreck
cosmictrainwreck's picture

my local restaurant has been running a special on BLACKBERRY JAM - coincidence? I leave it for you to decide

Tue, 07/26/2011 - 10:18 | Link to Comment williambanzai7
williambanzai7's picture

There'll be blackberry jam long after BB is synonymous with dodo.

Tue, 07/26/2011 - 09:51 | Link to Comment williambanzai7
williambanzai7's picture

Hey Joe, is that a smart phone you have there or a margin compressor?

Tue, 07/26/2011 - 09:47 | Link to Comment Almost Solvent
Almost Solvent's picture

Excellent as always, Reggie!

 

This thing is far from over. Not until at least 2 years after the iPhone went to VZW can we look to see the number of former BB users who ditched for an iPhone or Android. My unofficial survey of people I know is close to 70% that either have, or plan to ditch BB as soon as their contract is up. The other approximate 30% have a company issued BB so they don't care becasue they don't pay for it.

Tue, 07/26/2011 - 12:06 | Link to Comment sun tzu
sun tzu's picture

I don't know anyone who has a BB unless it was supplied by their company. 

Tue, 07/26/2011 - 13:46 | Link to Comment equity_momo
equity_momo's picture

This is RIMMS major Achilles Heel.  With UE in white collar jobs about to catch up with main street in the next year or two , BB users will plummet - everyone uses Apple now for their p/a phone and the days of 2 p/a phones is long gone.

RIMM relies on big business too much.

I would switch back to BB if they could fix their web browsing though, its just terrible. I do hate the I PHone for messaging , touch screen typing will never be as smooth as a key pad regardless how good Apple are.

RIMM should be developing a killer phone/tablet , with a keypad and solid browser at a great price and steal Apple customers as the job layoffs come. Apple is 9/10ths BS marketting , people are hoodwinked by the cult and believe its a far superior product.  Theyre good but only because competitors have dropped the ball.

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