Wag the dog - Using a Long Squeeze to cover the Short Squeeze
First off, I'll state that I hold a small long position in RIM. Only 100 shares. I'm not a big investor, I'm doing it just for fun because I'm excited about the potential of the BB10 platform as a consumer, developer and technologist. I just thought I'd throw my 2 cents into the arena which seems to be going wild with speculation.
As of the end of November, over 20 percent of the stock was held by people holding short positions. For those unfamiliar with the term, these are investors who are betting on the stock price falling since they picked up their position so they can sell their borrowed stocks at a high rate and repurchase those shares when the stocks fall. Leading up to the Q3 Earnings Report, the share price continued to rise. The positive earnings report would have continued to push up the share price, putting increasing pressure on short sellers to cover their positions, leading to a 'short squeeze' and a large rally in the stock. To head this off, the Earnings Call last night demonstrated a political tactic known as 'Wagging the Dog'.
To 'wag the dog' means to purposely divert attention from what would otherwise be of greater importance, to something else of lesser significance. By doing so, the lesser-significant event is catapulted into the limelight, drowning proper attention to what was originally the more important issue.
In this situation, the issue of the changing service rates was brought up repeatedly by analysts during the question period of the Earnings Call. RIM is unwilling to detail the full features that they're planning on unveiling on their platform prior to the Jan 30th launch, so the lack of available guidance has spooked the market, leading to the significant decline in share prices as long positions dump their shares. By calling into question the longterm viability of RIM's established service revenue, they've initiated a fairly groundless long squeeze to balance out the impending and significant short squeeze.
The core business fundamentals that RIM has demonstrated with their Earnings Reports over the last 2 quarters has shown they understand how to successfully manage a turnaround, taking a company that was spiraling into oblivion and catapulting them back into relevance. The carrier and developer excitement surrounding their BB10 platform demonstrates that they've got their hands on a solid product that *will* sell. These are the key issues that are being eclipsed by the wagging of the dog.
RIM's service revenue model was bound to change. They are offering new features in BBM voice and video chat that will require new BB data plans. If they'd announced there were no changes pending for their data plans, I would have been worried. Instead, they met the challenge head on and the market reacted like sheep as a number of analysts tried to bully information out of RIM regarding the planned changes.
What really upsets me is that Crackberry is hopping on the scared sheep bandwagon with the rest of the market. Its the same as when Thorsten announced the 2 month delay. Kevin acted like he was crushed and took it way too personally. This is because he's got so much money tied into supporting the platform via the Crackberry brand that he is financially tied to the success or failure of the platform. I know he and other bloggers on this site have a sizeable investment in the Blackberry platform as a whole. But they're also leading the social media charge. For them to falter because a number of analysts asked questions they knew couldn't be answered until next month shows a significant lack of faith in the potential in the platform on their behalf.
For shame, Crackberry. For shame.
12-21-12, 02:35 PM #2
- 870 Posts
RIM (RIMM) Service Revenue Will Decline, Not Disappear Stresses Goldman
Shares of RIM (NASDAQ: RIMM) declined this morning on fears related to changes in its service revenue model for BB10. Goldman Sachs believes the decline is a result of "misunderstanding". Analysts expect it to decline, not disappear.
"Importantly, we believe there may be a misunderstanding that as a result of the move to BB10, all of RIM's services revenues are at risk. Rather, we believe its current installed base will not be affected by the different BB10 pricing structure, though it will continue to be impacted by competition," said analyst Simona Jankowski.
New consumers who purchase a BB10 device are not likely to pay a service fee, but importantly, existing customer will. New enterprise subscribers would probably pay some level of service fee, though plans will be tiered and APRU could declined. New BB7 subscriber will pay service fees, noted the analyst report.
A second point worth noting is increased carrier support for BB10, seen by some on Wall Street as a trade-off for lower service fees.
"Importantly, RIM noted that BB10 is now in technical acceptance programs with over 150 carriers, up from 50 carriers about three months ago," said Jankowski.
Jankowski thinks there is a 30 percent probability of a "bull case" for Research In Motion. In this scenario, RIM stock would be worth $30 per share.
Goldman Sachs has a Buy rating on RIM with a modified price target of $17.00 (from $16.00).
For those who pay attention to such things, the traded share volume today was over 120 million, which is surprisingly close to the number of short sellers holding positions.
I'd like to know how many short positions were covered today.
- 12-21-12, 03:02 PM #5
At the risk of being labelled too negative I'd like to point out a few things. RIMM lost 1,000,000 subscribers in 3 months, the first time it actually had a net loss in the history of the company. That is 1,000,000 subscriber fees goen each and every quarter and 1,000,000 former customers who are very unlikely to trash their brand new phone for a BB10 device early next year. Revenue was down almost 50% from the same quarter dismal quarter year. RIMM beat vastly lower estimates. RIMM did NOT do well, they only didn't do a horrifically as some estimated they would. RIMM announced the sacred service fees were being altered and while they would not go away, they are very likely to be reduced. It was almost pure cash to them. RIMM's stock was already up 100% in a very short time, seeing a pull back like this very common and not a long or short squeeze, its just the way markets usually operate. Being removed from the index and funds being forced to sell didn't help. Lastly, while BB10 looks promising, and many are holding out and waiting, including myself, the success of BB10 is by no means assured. It is still a huge risk.
My point is that conspiracy theories aside, there are plenty of factual, provable and legitimate reasons why we have seen a 20% sell-off today.
- CrackBerry Master
12-21-12, 03:16 PM #9
- 1,392 Posts
It's not all negative out there:
–UBS kept its “neutral” rating on RIM and left its price target at $9.50. It said it was impressed with both RIM’s growing cash balance, and what it called the “overall tone” of the company’s fiscal third quarter earnings. Still, the bank’s analysts are “staying on the sidelines” until they “have greater conviction” on whether RIM’s new operating system, BlackBerry 10, due out next month, will be a success.
–GMP Securities also kept its rating unchanged, at a “hold,” but increased its target price from $8.85 to $11, positing that with the current share price “well below book value of $17.80, RIM may attract a takeover bid with meaningful potential upside. ” GMP noted concern over changes in service revenue, and that “lower service fees with BB10 will put significant pressure on profitability.”
–Bernstein Research analyst Pierre Ferragu wasn’t moved by the huge stock drop and maintained his “market-perform” rating, with a $12 price target. “If Blackberry 10 is a success, the stock isn’t going to trade where it is today but probably at a multiple of it!” Mr. Ferragu wrote in his note. “A structural decline of Service revenues in the mix cannot be considered a downside risk on the recent stock price in such a scenario.
Analysts Weigh in on RIM, As Shares Drop Sharply - Canada Real Time - WSJ
- 12-21-12, 03:17 PM #10
When the earnings report itself came out before the call, the stock (in after-hours trading) was soaring, up around 10%. Only when the CEO popped out that little tidbit about the change in subscriber fees associated with the BB10 launch did things turn around.
The market was ready for a small reduction in the subscriber base, and a loss, and whatever else might have been in there which wasn't great. RIM actually surprised everyone by increasing the cash position massively, and with the other relative good news... it was only this one surprise that accounts for the entire drop.
And it's too bad that so far everyone overlooked the other good news today, like the settlement with Nokia over the patent issues. If you see the drop as being from a +10% change before the call, to -20% today, you have to wonder whether everyone out there really thinks that adjustment in the business model warrants a 30% drop in the share price... I'm giving this one to Mayans.
- 12-21-12, 03:26 PM #12
- 12-21-12, 03:36 PM #14
I think a lot of people think that service revenue is going to completely disappear very soon, which is not the case. Also, with a non-dated product portfolio, RIM can actually make money on hardware - perhaps getting us to the point a couple years ago where hardware accounted for around 70% of gross margin. If they can do that, even if service revenue does decrease some, it will have limited impact on the bottom line.
- 12-21-12, 04:02 PM #16
I'll be laughing when in six months people realize that RIM actually increased the service-related revenues overall. For now, it's just painful to watch the carnage.
- CrackBerry Abuser
12-21-12, 04:42 PM #18
- 381 Posts
You are the dog. The tail is wagging you.
I feel some bittersweet redemption. People talking about 40M phone sales and $100 stock prices are out of touch with reality.
Here's reality: RIM might not make it, it might get broken up, it might sell 15M phones next year and that would be a success. But most of all RIM gave their loyal high paying north american customers the bird and now they are struggling to stay solvent. BB10 is not a super awesome solution to a recovery. The road is long hard and may not even exist.
Now get over yourselves and eat some reality cake for a change.
- 12-21-12, 04:47 PM #19
OK, it's settled which removes uncertainty, but it will cost RIM big money now and in future to licence the tech Nokia's patent covers. Apple reportedly paid Nokia $608 million in royalties last year to settle the same patent infringement issue and will pay ongoing royalties (as will RIM now) to Nokia forever more.
That must surely eat into RIM's cash reserves, and comes on top of the "market unsettling" talk of reduced subscriber fees in future.
Hard, for me at least, to see it as good news.
Last edited by JeepBB; 12-21-12 at 05:16 PM.Proud Member of the PlayBook Beta Test Team (Since June 2011)
- CrackBerry Addict
12-21-12, 06:30 PM #22
- 822 Posts
- CrackBerry Master
12-21-12, 07:06 PM #23
- 1,392 Posts
If I may be allowed this bit of whimsy:
Analysts are skeptical of RIM's success due to a potential 'tiered' service structure for a device, BB10, which, these same analysts claim, has no chance for meaningful uptake?
In other words, they are now worried about a lack of service revenue from a phone they deem will fail anyway?
- 12-21-12, 07:49 PM #24
Obviously it is a very speculative play due to the extremely wide range off possible outcomes for BB10 though.
- 12-22-12, 12:04 AM #25
If you had a company and wanted to sell 10,000 phones using Nokia's patent, they are not going to charge you $608 Million.
You'll be charged based on wanting to use it in 10,000 phones.
My point is, the licensing and royalties are proportional to whatever RIM sells. So it's not exactly a significant loss.
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