Shorts betting big against rebound at RIM

BlackBerry market share still shrinking amid iPhone mania

Mar 14, 2012 @ 9:21 am

Research In Motion Ltd. Ticker:(RIM) shares have lost more than 90 percent of their value since mid-2008. That hasn't stopped a surge in bets that the stock will sink further as the BlackBerry maker prepares to report earnings.

Short interest in RIM climbed to 59.2 million shares at the end of February, the highest since January 2004, according to data compiled by Bloomberg and stock exchanges. Investors taking short positions borrow and sell a stock, aiming to profit by repaying the borrowed shares at a lower price.

RIM's share of the U.S. market fell to 15 percent in the three months through January from 17 percent a quarter earlier, according to ComScore Inc. Photographer: Chris Ratcliffe/Bloomberg

Short sellers are betting that newly appointed CEO Thorsten Heins won't be able to reverse RIM's fortunes as it struggles to staunch market-share losses to Apple Inc. (AAPL) and Google Inc. Analysts predict Heins, in his first earnings announcement since being named to the top post in January, will report sales for the holiday period that missed the company's own projections.

“They have not kept up with the new world,” said Buzzy Geduld, chief executive officer of New York hedge fund Cougar Trading. “Where kids used to all use BlackBerrys, they're all using iPhones now; where companies used to all use BlackBerrys, they're now using iPhones and BlackBerrys.”

While the BlackBerry 7 models introduced last year offer improved Web browsing and touch-screen navigation, RIM continues to lose sales to Apple's iPhone and devices running Google's Android software. RIM's share of the U.S. market fell to 15 percent in the three months through January from 17 percent a quarter earlier, according to ComScore Inc. (SCOR) Apple and Google together share 78 percent of the market, ComScore said.

Shipment Miss?

Even growing sales in emerging markets including Indonesia and India cannot make up for the U.S. slump, where revenue fell 45 percent in the quarter ended Nov. 26. RIM's share of the global smartphone market slid to 8.2 percent in the fourth quarter from 14 percent a year earlier, while Apple's share rose to 24 percent from 16 percent in the same period, according to IDC.

Analysts are growing increasingly bearish in their forecasts for sales this quarter. Peter Misek, an analyst at Jefferies & Co. in New York, said this month there is a good chance that RIM will announce disappointing results before it's scheduled to report earnings because BlackBerry shipments will have missed the company's target of 11 million to 12 million units. Misek has the equivalent of a sell rating on RIM.

Tenille Kennedy, a RIM spokeswoman, said the company will give a business update March 29 and declined to comment further.

Just five of 53 analysts who rate RIM recommend buying the stock, while 33 recommend holding and 15 selling. Sales fell to $4.54 billion in the quarter that ended March 3, the average analyst prediction shows, whereas RIM said in December that the period's sales would be $4.6 billion to $4.9 billion.

Losing Traction

RIM rose 2.9 percent to $13.49 yesterday in New York. It has lost 7 percent this year after falling 75 percent last year.

Beyond generating more interest in BB7 phones, Heins has said his most important goal is to get the first BB10 model, based on the new QNX operating system, into customers' hands on time. Mike Lazaridis, the BlackBerry inventor and former CEO who Heins replaced in January, said in December it would come out in the “latter part” of 2012.

“The company will continue to lose traction until it showcases its next generation of products based on QNX and the latter is very unlikely to generate renewed consumer traction,” Pierre Ferragu, an analyst at Sanford C. Bernstein & Co., said in a note yesterday. He rates RIM the equivalent of hold.

Not Much Faith

The first BB10 model will be delayed because the chipsets needed to deliver better performance and battery life wouldn't be available until mid-2012, Lazaridis has said. A spate of recent product delays has hampered investors' confidence in RIM, said Cougar's Geduld.

“The problem with the pipeline is that these guys keep postponing when it's coming out,” Geduld said. “I don't think anybody has that much faith that in six months they're actually going to have a real game changer.”

The short interest ratio, a gauge of investor sentiment, for RIM climbed to 4.5 percent on Feb. 29, the highest since July 2003, according to data compiled by Bloomberg. The same ratio for Apple is 0.42 percent, or about one-tenth of RIM's. Google (GOOG)'s is 1.4 percent.

A different metric shows short sales continued to rise this month. Bearish bets against RIM reached 4.7 percent March 9, up from a 2012 low of 1.2 percent on Jan. 25, according to New York-based Data Explorers, which compiles securities-lending data to tally short selling daily. That compares with the 2.8 percent average short interest on the Standard & Poor's 500 Index, the benchmark index for American equity, the data show.

‘Dramatically Different'

Geduld, who has shorted RIM in the past, said he doesn't own the stock now as he doesn't want to be exposed in the event that a bid emerges for the company and the shares surge.

“The bulls see some value there that somebody comes in and buys them, and the bears see a continued deterioration in sales,” he said. “That's the long and short of it.”

RIM trades about 50 percent below its book value, or the net value of its property, patents and its other assets, making it attractive for anyone willing to try and fix RIM's current strategy, Bernstein's Ferragu said. David Einhorn's New York- based Greenlight Capital Inc. hedge fund bought RIM shares in the fourth quarter.

Heins has said the company has to do something “dramatically different” to win back U.S. consumers. In his first conference call with analysts, he said he has no plans to split up the company or sell businesses. He has also said RIM has held talks with rivals eager to license its software.

Risking a Squeeze

Harry Rady, who heads Rady Asset Management LLC in La Jolla, California, held both long and short positions on RIM last year. He doesn't now and says it's currently too risky to invest either way, particularly when the cost of borrowing to short the stock is “huge.”

“You risk a short squeeze with any talk of a takeover or anything being done to unlock its patents,” Rady said in a phone interview.

In spite of RIM's falling market share, RIM's defenders point to its portfolio of technology patents and base of 75 million subscribers as assets that any rival would want to own. Those are assets no investor should ignore, Rady said.

“One side of the boat is sinking and the other one is filled with gold and it's a question of whether the boat can be rowed ashore before the treasure is lost.”

--Bloomberg News--


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