Investment Contrarians

The Key Number in RIM’s Earnings Release

By for Investment Contrarians |

RIM’s Earnings ReleaseThe latest quarterly report from Research In Motion Limited (NASDAQ/RIMM; TSX/RIM) was a positive surprise, which resulted in the shares moving up strongly following the news. Yes, Research In Motion (RIM) has had one of the sharpest declines in recent memory among technology stocks, but some investors are stepping in thinking that perhaps the worst is over and the market view has become overly bearish.

The important thing to note when investing is whether a company can beat expectations. The market view is what drives prices in any market. The more popular something is, the higher the demand and, thus, the higher the price. RIM’s stock has been beaten up with extremely poor sales results, therefore the market view was negative, and rightly so. However, this quarter the company exceeded estimates, which admittedly were low, for both revenue and the number of devices shipped. The CEO also stated that the company’s customer base also went up, from approximately 78 million users to 80 million.

RIM has failed to evolve and innovate against competing technology stocks, and this has meant that in a sector in which tastes change rapidly, it has fallen out of favor with the market view. This has not yet changed, as the company has yet to release its new operating system, due out in early 2013, so it has not yet made any significant gains in market share. Make no mistake, RIM is far from safe, but the key metric I was looking for was its cash levels.

Cost cutting was extremely important, as revenue, we knew, was going to be down. If costs could not be cut in time, its cash pile would continue to dwindle. What has the Street turning somewhat positive is that RIM increased its cash to $2.3 billion from $2.2 billion in the first quarter. The original worry was that if it ran through its cash pile, then the firm would be a possible bankruptcy candidate; however, this level of cash buys it time. While revenue from the year-ago period was down 31%, it was up two percent from the first quarter.

While RIM’s market share has completely crashed against other technology stocks, the market view might now look at the company from another perspective. It is true, it most likely won’t ever reach the dominant position it once held, but there might still be a place for RIM among technology stocks in this sector.

The market view has been extremely negative for RIM, as compared to other technology stocks in this sector, and with good reason. Apple Inc. (NASDAQ/AAPL) has gained a massive amount of business, as the firm has consistently created products that consumers really want. RIM sat back and stopped innovating, leading to this persistent negative market view.

Research in Motion Chart

Chart courtesy of www.StockCharts.com

While some technology stocks have recently seen strong performances, RIM is certainly not one of them. There has been constant heavy selling, as the market view was negative. However, we’ve just seen what might be a short-term bottom in the stock. With the break above the downtrend line in September, and now the gap up, the market view might have shifted, at least over the short term. The most likely level for resistance will be approximately $11.40, where both the 200-day moving average (MA) and the 38.2% retracement levels coincide.

We won’t know for some time how effective RIM’s new operating system will be in penetrating the market against other technology stocks. RIM also needs a different market view, as it’s no longer competing with other technology stocks in North America for the consumer market, but should focus on the business user. The company does have a large customer base in emerging markets, such as Indonesia, but the handsets there are lower-priced and, thus, there is a lower profit margin.

While my market view regarding technology stocks is positive in general, I would wait to see if RIM can gain some market share against other technology stocks with its new operating system. If RIM can’t grow its market share against other technology stocks, then there’s no reason to think that the stock price will move substantially higher over the long term. Short-term, it might be a great trading vehicle to get in and out of positions; but for a core position, we need to see significant market share gains to have the market view shift in its favor.

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