Short RIMM

[Groty]

Shorted RIMM at $86 a couple of weeks ago shortly after the patent dispute was settled. What follows is the rationale. I'd appreciate constructive comments.

By not settling the patent suit, RIMM irreparably damaged its business. They could have settled the patent issue two years ago for $50 million, but chose to fight it. Last year they could have settled for $200 million, but chose to fight. They finally settle this year for over $600 million. How management handled the patent dispute was a huge misstep and raises questions in my mind about their ability to lead and manage.

And because of the uncertainty created by the patent dispute, RIMM lost alot of potential customers to competition that came out of nowhere. For example, PALM picked up over 500,000 subscribers with the TREO in the past year. And those subs aren't likely to switch to the higher priced RIMM solution now that the patent dispute is resolved.

Other competitors are emerging. Microsoft recently announced its Origami. HPQ has a device to be released soon. Motorola's Q takes a form factor similar to the popular Razr - very sleek, sylish, and lightweight. It was initially planned to ship during 1Q, but that is slipping (bummer). NOK will have a product out by Q3.

Wireless email is a huge and still way underpenetrated market. But where RIMM once effectively had a monopoly, it now faces intense competition. The market will contiue to expand rapidly, but RIMM's share will decline and pricing and margins will get squeezed. The short case really rests on the fact that Feb. '07 estimates haven't come down yet to reflect the new compeitive environment.

The stock trades at about 45x trailing earnings and 26x forward estimates which I think are too high.

Is it foolish to short the leader in an expanding market based on emerging competive concerns?

[AvivaSimplex]

I wouldn't say it's foolish, but it's not something that gets me excited. 45x and 26x are not outlandish valuations for a leader in an expanding market. Blackberry still has the top brand and a very dedicated customer base. The main concern is that competition will squeeze margins and market share. I think margins will remain high for all entrants over the next couple years. Handheld email appeals to people who have a lot of money to spare, and competition will be mainly on features, not price, for the next few years.

RIMM may fail vs. the competition, or its price might stagnate, but then again it could leverage its first mover advantage and maintain a majority of the market. There are plenty of other companies that are losing money and have no prospects of recovery (NTMD, for example) that are better short candidates.

[Groty]

Thanks Aviva. I'll take a look at NTMD this weekened.

I just finished reading the report Goldman published on RIMM yesterday. They lowered their estimates for the first and second quarter slightly, but raised them slightly in the third and fourth quarter. They think the Street isn't fully appreciating high margin service revenue potential. They also think there's pent up demand for RIMM's new device which may take a couple of quarters to realize.

This thing has been a roller coaster. Guess I'll cover. I don't want to hold it through earnings next week after reading that report.

[Groty]

True to my word, I covered my short for a slight profit.

I hate money so I'm thrilled to watch it trade down now in the aftermarket for over $7. I'm such a donk.