RIM missed earnings, guidance and gross margins in the latest quarter. The only positive that I could find was the higher expected phone shipment ("27% to 37%") in the coming quarter, and it was mostly due to their over-stuffing the channel in the previous quarters. The new BlackBerry 7 smartphones, which they touted so much in the conference call, are part of "the transition to QNX-based smartphones". That is real comforting for their long-term customers. All their future hopes are hanging on QNX-based smartphones, which are expected in 2012.
The main negative surprise for me was their paltry 200,000 PlayBook shipments, which were down 60% from previous quarter. Clearly, they were no match for iPads. The other downer was that they spent $780 million in acquiring part of the Nortel patent portfolio through a consortium, in which Apple is a part of. Since RIM needs to knock-down Apple and destroy the Android camp in order to compete, I just don't see the point of spending nearly a billion dollar to buy a bag of patents, which are useful for leaders to defend themselves against copycats. Does RIM have any copycats today? This is the trouble with troubled companies, which tend to throw good money after bad. HP (HPQ) just illustrated how they swallowed and choked on Palm.
RIM used to be a very successful and well-managed company. In many ways, it still is. I first encountered the stock at my old shop where my tech analyst was using a cool BlackBerry instead of a pager in the late 90s. They were the first major company to embrace message centric devices with full keyboards to counter then popular Palm OS-enabled devices using handwriting for input. RIM was able to dominate the personal digital assistants (PDAs) market, and later on the smartphone market. As a result, Palm was pushed to the brink of bankruptcy before HP swallowed it and now is trying to puke it out. I was a RIM customer and investor for years until Apple's introduction of iPhones in 2007 when I realized how great the iPhone was! The trouble at RIM has little to do with RIM itself, but everything to do with the iPhone. What Apple did to RIM is similar to what RIM did to Palm. This is just part of the tectonic shift, which happens from time to time in tech, and RIM just happened to be on the sinking side.
Position Recap
Since I recommended shorting 5 RIM Jan. 13 $40 strike calls vs. buying every 1 Apple Jan. 12 $400 strike call on Tuesday, Sept. 13, RIM shared tanked about 20% on the earnings' bust and Apple went up about 4% at the same time. Apple's (AAPL) calls are almost in the money now. RIM shares are 66% away from the $40 strike, quite safe from a takeover bid. As a result, RIM's call premiums got cut in half (from $4 to $2) and Apple's gained 18% from ($26 to $30.5). It was a good start and we should consider camping out for the new iPhone 5s.
at seekingAlpha.com:
http://seekingalpha.com/article/294308-the-trouble-with-rim-has-little-to-do-with-rim-itself
Friday, September 16, 2011
Tuesday, September 13, 2011
Long Apple Calls against RIMM Calls
Overview
The recent spike in volatility provides an excellent opportunity in shorting long-dated Research In Motion (RIMM) Jan. 2013 $40 strike calls ($4/contract at 44 implied volatility) against long Apple (AAPL) Jan. 2012 $400 strike calls ($26/contract at 32 implied volatility). I would recommend the trade at a ratio of 5 (RIMM calls) to 1 (AAPL calls). The central thesis of the position is to use options to express a bullish view on Apple and a bearish stance on RIMM. The expiration date for Apple is chosen to take advantage of the anticipated excitement of the introduction of iPhone 5 and the potential strong product momentum during the holiday season. Since RIMM has been a volatile stock along with the general volatile market, its option premiums have been highly inflated across all strikes and expiration dates. However, a short-term volatile stock does not necessarily mean a big long-term upside, which depends on the company's future prospect. If the trends for both companies were to continue (there is little evidence to the contrary), the upside for the position can be substantial with very little net premium upfront, which is preferable in the current uncertain and volatile environment.
Key Risks
1. A Turn-around at RIMM
At this point of the race to dominate the mobile devices, it is very hard for RIMM to catch up to Apple and Android. Their main competitor Apple is like the Mongol cavalry under Genghis Khan in the early 13th century. In order to compete effectively, RIMM needs a superior phone and a better tablet at the minimum. In addition, it needs to catch up in the race for apps as well. In other words, it really needs a miracle, and they don't have Steve Jobs as the great Khan.
2. A Disappointing iPhone 5
This is probably the biggest risk of all. However, I think this is highly unlikely given Apple's past track record and its perfectionist culture because Apple would rather delay a product than introducing a half baked device. A delay of the introduction of iPhone 5 until 2012 might be a bigger risk.
3. A Potential Takeover of RIMM
My thesis of shorting RIMM has been based on its deteriorating competitive position against its competitors. It is always possible that some company may be interested in RIMM as a strategic asset or its patent portfolio as it was the case for Motorola. However, this is highly unlikely after Microsoft decided to push for its own Window phones with Nokia and the rest of the pack joined the Android camp. In addition, RIMM still commands a market cap of about $16 billion, a realistic takeover price tag has to be north of $20 to $25 billion, a hurdle very few companies can clear. To mitigate the potential takeover risk nonetheless, I picked the $40 strike, which is at a 33% premium to where the stock is currently trading. If the deal is in cash, the option premium would evaporate substantially. If the deal is in stock of a bigger acquirer, the call option should trade at a much lower premium, reflecting the lowered implied volatility of the acquirer.
4. Premium Decay
Because of the mismatch of the expiration dates of two calls, the decay on Apple call options is greater than those of RIMM. However, the decay is not significant until December.
The recent spike in volatility provides an excellent opportunity in shorting long-dated Research In Motion (RIMM) Jan. 2013 $40 strike calls ($4/contract at 44 implied volatility) against long Apple (AAPL) Jan. 2012 $400 strike calls ($26/contract at 32 implied volatility). I would recommend the trade at a ratio of 5 (RIMM calls) to 1 (AAPL calls). The central thesis of the position is to use options to express a bullish view on Apple and a bearish stance on RIMM. The expiration date for Apple is chosen to take advantage of the anticipated excitement of the introduction of iPhone 5 and the potential strong product momentum during the holiday season. Since RIMM has been a volatile stock along with the general volatile market, its option premiums have been highly inflated across all strikes and expiration dates. However, a short-term volatile stock does not necessarily mean a big long-term upside, which depends on the company's future prospect. If the trends for both companies were to continue (there is little evidence to the contrary), the upside for the position can be substantial with very little net premium upfront, which is preferable in the current uncertain and volatile environment.
Key Risks
1. A Turn-around at RIMM
At this point of the race to dominate the mobile devices, it is very hard for RIMM to catch up to Apple and Android. Their main competitor Apple is like the Mongol cavalry under Genghis Khan in the early 13th century. In order to compete effectively, RIMM needs a superior phone and a better tablet at the minimum. In addition, it needs to catch up in the race for apps as well. In other words, it really needs a miracle, and they don't have Steve Jobs as the great Khan.
2. A Disappointing iPhone 5
This is probably the biggest risk of all. However, I think this is highly unlikely given Apple's past track record and its perfectionist culture because Apple would rather delay a product than introducing a half baked device. A delay of the introduction of iPhone 5 until 2012 might be a bigger risk.
3. A Potential Takeover of RIMM
My thesis of shorting RIMM has been based on its deteriorating competitive position against its competitors. It is always possible that some company may be interested in RIMM as a strategic asset or its patent portfolio as it was the case for Motorola. However, this is highly unlikely after Microsoft decided to push for its own Window phones with Nokia and the rest of the pack joined the Android camp. In addition, RIMM still commands a market cap of about $16 billion, a realistic takeover price tag has to be north of $20 to $25 billion, a hurdle very few companies can clear. To mitigate the potential takeover risk nonetheless, I picked the $40 strike, which is at a 33% premium to where the stock is currently trading. If the deal is in cash, the option premium would evaporate substantially. If the deal is in stock of a bigger acquirer, the call option should trade at a much lower premium, reflecting the lowered implied volatility of the acquirer.
4. Premium Decay
Because of the mismatch of the expiration dates of two calls, the decay on Apple call options is greater than those of RIMM. However, the decay is not significant until December.
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