In Cash We Trust, In RIM We Don't
RIMM is valued at $74B, with sales of only $6B- valued at 12x sales and 58x profit. Investors are paying more per share than the company will earn in its lifetime. What do earnings mean to a outside shareholder? (Really nothing) Will there ever be any ROI? Will a shareholder ever receive a meaningful share of profits from RIM? NO The company showed a profit of $1.3B for the last 12 months, at that rate it would take 58 years to earn $74B (58yrs X $1.3B =$74B). A simple example of the overvaluation: Would you buy a company with sales of $100,000 for $1.2 million, or would you invest that at 6% and earn $72,000 per year (almost as much as sales)? If RIMM had a net income of $1.3 B per year it would still take 58 years to earn what the company is valued at, and that would be after tax dollars. Even if profits increase it would still take many many years to earn that valuation. What can an outside shareholder expect to receive from the company? Will they ever share in the profits? Can RIMM afford to pay a meaningful dividend? A 5% dividend would total over $3.5B or about $5/sh, something the company could not afford, as it is almost as much as their sales. Would anyone buy RIM for $74+ billion in cash, they could invest that $74B @6 % and earn $4B/yr? RIM is quite a conundrum here but more importantly a textbook example of the Law of Diminishing Returns. P/E deflation has seem to have started and the short trade has been in effect since the failure on the double top. The idea that future growth justifies a 73 P/E is just plain ridiculous. Longs who share this thesis fail to understand the overall overvaluation of P/E's of the stock market as an aggregate. Until this is understood, then longs can keep wearing those same blinders from 2000. Just be nimble enough to take them off in time (most traders won't). True RIMM is growing sales/profits by 100% but this is not sustainable and the Street is smelling this. So the long thesis is correct when they say that RIMM valuation is justified RIGHT NOW because they are operating "within the bubble". It is granted that RIM may raise guidance soon but this will not outweigh a breakdown in the NDX this week. Note that the broader index is always stronger than any specific sector. Despite the moneyflow into tech that is currently keeping this sector afloat, the line of least resistance right now is still down. With earnings over 2 weeks away (an eternity) for RIMM, we may have to see RIMM taken down much further before we see the earnings runup. The time to honor this valuation bubble is coming to an end...fast. Swim upstream if you prefer, but like spawning salmon, only a few make it while thousands don't...
Technical Analysis
Many shorts were shaken last Thursday but cooler heads noticed that RIM was not able to close over the 20dma that session. A gap down Friday saw a breakdown in the bullish channel on decent volume for those shorts who did not panic. RIM has retraced it's previous gap-up from last month. The last 3 sessions formed an evening star on the candles and also bounced off the 61.8% retrace of the top. This all makes for a very bearish chart setup. Given the selloff in the broader indexes, RIMM is now technically set up for a climax sell off. A break of 130 support and this may test the 50dma (127.50) intraday.
Trade Signal: Neutral
Disclosure: In Cash
Quote of the Day
"After logic is exhausted, then the trader must rely on instinct. There is no oscillator for that...” - Cash (on staying short last Thursday despite the pain)
Video of the Day
RIM Lost, They Just Don't Know it
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4 comments:
Welcome back -- so please explain exactly what was happening the final 45 minutes of the day? The fundamentals didn't change and in listening to the WWDC, Blackberry is in Apple's sights. Obviously Apple did not "win" yet vs. Microsoft -- Blackberry is no MS.
Strong resistance at 128ish, teeny tiny gap on the candles, and once that gap is filled, look at below! It has come up to it and failed a few times recently.
I will add to short only once that occurs.
Seek,
All week will be choppy as it is a daytraders market and RIMM has always been a traders stock. I took profits on the rest of my JUN call writes before WWDC.
Today we saw a hard technical bounce off the 100% retrace of the top and also the 50 dma. Pumpers were hawking for a chance, and they jumped on it after the huge rundown FRI and the Apple inventory nonsense today. Short covering at the close today also.
Further downside on a decisive break of 128...coming soon
When does the distribution from the institutions end so that the elevator ride can happen to the bottom floor?
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