Is RIMM Overvalued?

Jim Balsillie?

The Headfake

Psssst...I have a secret. There are many of them on Wall Street and if even a fraction were revealed, the public would bail in exodus. Are you ready? Here is one of those secrets: RIMM is a trade, not an investment. Don't tell everyone though, because the Street needs this RIMM vs. Apple rivalry just like boxing needed the Ali vs. Frazier rivalry decades ago. The companies need to perpetuate to the Street the perception that the smartphone industry is not just growing, but exploding. And what better marketing ploy than hype. It worked for boxing, and now the question is will it continue work for this industry. The Street has been promoting this rivalry shamelessly like Don King, but this time in expensive Brooks Brothers suits. The rivalry is intended to fuel the appetite of Wall Street's well oiled machine: overvalued companies with inflated P/Es. Well, looks like history is repeating itself here.

It's crucial for companies to to sell the public the perception that PE's are justified. The Street and certain media outlets (CNBC) will play along because it is bad for business to report the real truth. Why? Because they don't exist to serve YOUR financial interests, rather you exist to serve THEIR financial interests (advertisers, investors, sponsors, etc.). And nothing lines their pockets more consistently than perception. Reality is for others to be confounded by. Guess who they need to perpetually place on the other side of their trades? YOU. And the reality is that certain funds on the Street can take stocks wherever they want, sometimes in collusion with other hedge funds (pre-planned Quad 40 takedown). Fundamental events are only excuses for these outfits to move a stock, resulting in exaggerated and sometimes conflicted moves. Those in doubt need look no further than last week's $40B dollar writedown by UBS that resulted in their stock doing a moonshot. With hundreds of institutions and funds competing/trading against one another, there is one thing for sure - the millions of retail traders/homegamers are merely deployed as troops for their tactical manuevers...

The Knockdown

RIM is a solid company that can justify its existence and has a faithful following with enterprise consumers. While Apple is encroaching on that space, RIM has been no slouch in the consumer market, with 38% of its BlackBerry subscriber base coming from there last year. I just don't see Apple being adopted and having cred in the enterprise market though, it's just NOT who APPLE is at their core (no pun intended). Maybe I will change my mind after getting a demo of the 3G version this summer. RIM should be confident enough in their brand that they don't have to go to efforts to duplicating Apple design. Come on folks this is embarassingly obvious. And could be an outlier of Balsillie's and RIM's inferiority complex in the consumer market. Imitation is not only a form of flattery but also inferiority. Anyways, years from now both these companies will still be respected players in this space. But after spending some time pouring through RIM earnings transcripts, the numbers DO seem lackluster. The real question is how can RIM continue to appease the high expectations that the Street relentlessly expects of sales growth. THE ANSWER IS THAT THEY CAN'T. This has always been the conundrum of exponential growth tech companies.

In RIM's case, it will be near impossible to sustain the earnings growth to perpetuate its current 65 multiple. It seems to me that RIM's parabolic growth can be partially attributed to the symbiotic relationship to Apple and each of its product launches. Similar to how Lindsay and Britney are constanty one upping each other, thus benefitting the broader brat market, but I digress. Will that competition end in domination? I'm referring to RIM...not Lindsay (nice visual though). Seriously, how long will they perpetuate the illusion? Could it be that after last week's runup that RIM stock is now priced to perfection?

To answer that question, the serious trader has to be willing to zoom out of the narrow focus of just RIM's valuation. And zoom out to the tech sector's valuation. Then finally zoom out to the overall PE valuation of the stock market. This valuation can be done by using an exponential growth method to arrive at how these types of growth values ultimately unfold. I won't bore you with details here (maybe in another post). To step outside the bubble is to ask where their current position in stock market cycle history is. For those interested pursuing that further, I recommend John Kenneth Galbraith's The Great Crash, 1929. A fascinating book that could have easily replaced all the required Econ reading I had to endure at NYU. It should be required reading for anyone investing capital at this volatile period in market history.

The Countdown

So is RIM overvalued and being fattened up (overbought) with the intention of a brutal flogging? If we have learned anything from the dot com era, it is that outlook is brightest before reality delivers a devastaing blow. I was only 19 at that time and never bothered to question how my $5,000 trading account kissed 6 figures so fast. I guess it's human nature to blindly approve of that which benefits us. Even invicible companies must now succumb to a bear market eventually, like Google, a company that was touched by the stock gods for years, until 2008. And since I am long RIM (70% of my portfolio), I have to summon the courage to question when the Street will break the illusion that many market participants labor under. That is open for debate but my instinct would say VERY soon. One thing is for sure, once that reality blow is delivered it will be hard for RIM investors to stay on their feet, just like Frazier in the 15th round.

Happy Trading,
Cash Mancini

Trade Signal of the Day: Hold

Quote of the Day

"Don't let yourself get attached to anything you are not willing to walk out on in 30 seconds flat if you feel the heat around the corner." - Robert DeNiro, Heat

Video of the Day:

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