Research In Motion is the Apple of My Eye: Four Reasons To Be Bullish on RIMM
A couple of weeks ago, I shared one of my trades on RIMM with our community. The trade was a naked put using the weekly options that expired this past Friday.
When you buy a put, you pay a premium and you have the right to sell at specific price. It’s just like insurance – if the value of the stock goes down you have coverage, but that coverage comes at price – the premium that you paid. When you sell a put, you have an obligation to buy the stock at a set price. But, you also get to keep the premium. When you sell puts, you are the insurance company.
I ended up buying back about half of my short put contracts for a profit of 1.2% in just 7 days – that’s a 70% annualized profit. Because I allowed the rest of the contracts to expired in the money, I was assigned the shares. I am now the proud owner of 1,000 shares of RIMM. Because I collected a credit of $0.57 on the strike $17 short put, my cost basis on those assigned shares is $16.43. Since RIMM closed at $16.78, I am currently showing a profit $0.38 on those shares.
Why would I allow those shares to be assigned? Because I am bullish on RIMM.
Given the abysmal performance over the past year – from a high of $70.54 nearly a year ago to a recent low of $12.45 – how can I be bullish on RIMM? Let me give you four reason:
1) Services Business: Hardware sales represents 73% of RIM’s revenue while services only represents 24%. However, the services business is growing far more rapidly than hardware business and contributes the majority of the operating profit. RIM’s services segment is estimated to be growing at 30% per year. Some estimates point to 71% of the total operating profit are from services. That is huge and growing.
2) Valuation: RIM’s fall from grace has resulted in the company being one of the best value equities in the tech space. The current price does not show the true value of the company – in my opinion. Based on the current EPS (5.18) and fore-casted growth (2.90%) the valuation of RIMM is close to $68. Even adjusting for the stock’s risk, the valuation is closer to $40, which is higher than where it is now.
3) Changes Leadership: RIM’s former co-CEOs Mike Lazaridis and Jim Balsillie had drawn the ire of shareholders for refusing to make bold changes in the company. They have recently been shuttle to other positions and the new CEO Thorsten Heins has indicated to the street that he has “significant” plans for RIM’s future. What does that mean? New hardware? Selling the company? I don’t know. We’ll have to wait and see. Heins did not give any indication that selling the company was in the plans. He’s bound by regulations not to disclose those sort of things. However, it is know that the Board of Directors has given serious consideration to others looking acquire company.
4) Apple is Going to Buy Research In Motion: Aghast! OK, relax. It’s just an idea. But it could make very good sense for both companies. I am certain that Steve Jobs (God bless his soul) would never allow such a thing – neither would Mike Lazaridis and Jim Balsillie. But, they are all gone from their former positions.
The blogosphere is a buzz with amount of money that Apple has on hand and what it could do with all the money, e.g., carpet 42% of the landmass or USA with $1 bills; buy Goldman Sachs; buy every MLB, NFL, NHL, and NBA franchise, etc.. Yes, they have a lot of money.
RIMM’s market cap is about $9B. Even at a 25% premium – which would make this RIMM shareholder very happy – that’s just a small dent in Apple’s $98B cash on hand.
Why would Apple buy RIM? Despite the what you hear about the Mac, iPod, and iPad, Apple’s all about the iPhone. The iPhone contributed 53% of Apple’s revenue from last quarter. And it is phenomenally profitable – estimates put it at 70% gross margin. That is a margin that is reserved for jewelry, hand bags, and shoes – not for consumer electronics.
In order for Apple to continue to command the current stock valuation, it must keep up margins and continue to grow revenue. Apple is doing a good job growing by adding new carriers and expanding worldwide – especially in China.
What is the biggest hurdle and untapped market for the iPhone? It’s the enterprise and government. This segment is very important to Apple and explains why they highlight the number of new companies using the iPhone on every shareholder call.
Who owns the enterprise and government markets? Research In Motion. As an enterprise user myself, I am green with envy when I see someone with their shiny iPhone 4s. I would even pay for the phone out of my pocket, if my company said that I could use it on our network. Since RIM already has the infrastructure in place for their phones, why couldn’t they do the same with iPhone.
If this crazy idea does come to fruition, you can be assured that Apple ensure that the existing phones are not compatible with the new service. Even if it could be done with a firmware update to the iPhone, Apple would need existing iPhone users to replace their phones. More iPhone sales!
Apple has also come under scrutiny lately for labor practices overseas. If Apple buys RIM, it could retool RIM’s existing facilities to manufacture iPhones, iPod, iPads, and Mac. That might be seen favorably among regulators who might otherwise reject the proposal.
This is just a crazy idea. But, I am certain that I am not the first one to think about. I think this make sense on a lot of different levels. This could have benefits both companies, their employees, consumers, communities, and shareholders.
The only clear loser would be Google’s Android. But, then again, maybe Google beats Apple to the bid and buys RIM first!
Eric Hale
OptionsANIMAL Instructor
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