Research in Slow Motion

 | Nov 27, 2012 | 9:23 AM EST
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When I heard several brokerage houses upgraded Research In Motion (RIMM), I almost lost my lunch. The stock is up 93% from its 52-week low mostly on positive comments and a legendary short squeeze (over 20% of the float is short). But is the stock really a buy or is it just a short-term trade that you probably already missed?

If you take a look at the second fiscal quarter that RIM reported late September, it's clear the company has a lot more work to do. Revenue was down 31% year over year to $2.9 billion. The company shipped 7.4 million BlackBerry smartphones and 130,000 BlackBerry PlayBook tablets. By comparison, Apple (APPL) sold 26.9 million iPhones and 14 million iPads. Apple posted quarterly revenue of $36 billion, up 27.2%. In fact, Apple had four times more profit in the quarter than RIM had revenue. Ouch! Now you see the scale of the problem that RIM faces.

Because of the weak sales, gross margins were destroyed. Margins fell to 27% vs. 41.5% the year before. For the six months ending Aug. 31, the company lost $1 billion and expects to end the year with a loss as well. Management is part way through its cost-cutting plan. The company is trying to lower costs by $1 billion by cutting about 30% of its workforce (5,000 jobs) by March of next year. Name a tech stock that has cut its way to greatness? You can't.

The stock moved higher on the thesis the worst is over and the new BlackBerry 10 smartphone, which is expected to ship in January, will jumpstart sales. The company has received very positive reviews of its new product and analysts have upgraded to stock based on those comments.

But let's face it. Research In Motion has a monumental task ahead of it. So what if the new devices have garnered some positive reviews? Positive chatter hasn't turned into sales yet. Even with positive reviews, the smartphone marketplace is so much more crowed nowadays it's going to be difficult to sway consumers who are on their fifth-generation iPhone. Or should I say it's going to be difficult to sell consumers a phone that ships in January for Christmas? Why couldn't they have targeted the months before the holidays to launch a new device? The consumer marketplace has become much more important than the business market where RIM made its bones.

The dramatic move in the stock is just a manufactured short squeeze designed to make a few traders money and not a fundamental change in RIM's business.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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