Can you go wrong shorting Research in Motion (RIMM) against Apple (AAPL)?

By: ispeculatornew
Date posted: 05.03.2011 (5:00 am) | Write a Comment  (0 Comments)

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Ahh I gotta say that it is very disappointing that I wrote this post about a week ago and since then, Research in Motion (RIMM) actually issued an earnings warning that caused the stock to crash 14% in Friday’s trading. However, I still believe in the long term trade so the post does remain very relevant!

It almost seems to obvious at this point. The recent launch of the Playbook was just one more confirmation that RIMM is doomed in the long term. To say that it wasn’t a success would be a spectacular understatement as the critics were very negative, the sales disappointed and it already seems as if the media has forgotten about it. This will certainly not give much incentive for developers to work on Playbook apps and while the Playbook will eventually have access to Android apps, it is nothing like RIMM executives were hoping for.

To be sure, Research in Motion is trading at a very low P/E ratio, especially when you consider the fact that it is a tech company, that itis profitable and actually still growing both profits and sales. Screams BUY right? Not quite… RIMM’s growth rate has been slowing down very quickly in the past few years. In 2009, Research in Motion had seen increases of both the Net Income and Diluted Earnings per share move from over 100% the previous year to about 45%. That number declined to under 30% last year and is poised to continue its decline in the next few years. Why?

Smartphone market

The key of course remains the fact that Research in Motion’s Blackberry line has lost most of its momentum and while it does retain a lot of its corporate accounts, there is also an increasing number of US companies that have been starting to use either Apple’s Iphone or Android powered phones. I have written about it in the past but the main driver of excitement and quality for smartphones is apps and RIMM has been unable to get developers to work on solutions for its hardware and that has been the case even in recent launches. The Playbook for example has only around 3000 apps while the Ipad and Android powered tablets have access to several times more. And it’s not getting better

Let’s look at valuations vs Apple (AAPL)

Research in Motion (RIMM) numbers:

[table “274” not found /]


Apple (AAPL) numbers:

[table “273” not found /]

I think it’s a matter of time before RIMM’s slower growth catches up and brings the two stocks further apart.  Apple is a much bigger company but still has much more growth left in store. Why? It has many “hot” products and its annual launches cycle gives users an incentive to upgrade which Blackberry users are much slower in doing. The Ipad has been a roaring success and there is absolutely no indication that the Playbook can even compete.

How long will it take?

I would think that over 2 or 3 years, this trade would absolutely pay off as Apple’s growth might slow down a bit but will probably be more than double whatever RIMM can put off (probably even more). I would expect Apple’s P/E ratio to remain near its current 20 and if RIMM does the same (there’s no reason to think it won’t), this trade would work out amazingly well.

What could go wrong?

I’m not too worried about Apple slowing down to an extent that would make me worry about this trade. However, there is always the possibility that RIMM could launch a wildly successful phone but as its tails more every month in the app space, that becomes less and less likely. The key will for Re

It will only accelerate

It’s not a trade over a few weeks

Disclosure: Long Apple (AAPL)

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