How to Put RIM Out of Its Misery

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

"There is winning and there is misery." -- Bill Parcells

NEW YORK ( TheStreet) -- If you have been an investor in beleaguered tech giant Research in Motion ( RIMM)over the past couple of years, it is safe to say that you are feeling pretty miserable. If you're not feeling some form of misery then you are probably not paying attention. Better yet, I would like to hear from you so you can share your coping strategies because as the quote above from legendary coach Bill Parcells states, there is no middle ground between winning and misery.

It's a foregone conclusion that RIM has lost its fight with Apple ( AAPL) and Google ( GOOG) over the smartphone and devices market -- a market that by all accounts that it perfected after trouncing Palm in the same manner that it now finds itself. What is the silver lining and can it recover?

These are the most important questions to consider when mulling over RIM as an investment. But the company, by its own admission has no idea what its next good idea will be. Remarkably there are many who now wish to proclaim that the company has become cheap by virtue of its recent close of $12.89. But solely from the standpoint of valuation, I remain unimpressed by any perceived value that may be hidden within the stock.

Investors need to understand what exactly is going on with this company and realize that the prudent thing to do is secure any profits and/or prevent any further losses that may be around the corner. Another way to say this is to quit while you're ahead. The fact of the matter is, even at $12.89 the stock yet remains expensive from the standpoint of its rapidly diminishing market share not only from Apple, but embarrassingly, from Nokia ( NOK).

When considering RIM, investors need to ask themselves, at what point will the market not only realize that RIM has no business trading above $10, but even worse, the company has no business. I really don't see a scenario where the stock will not drop into the single digits at some point this year unless it gets acquired by another firm. For further confirmation of this, one only needs to look at the results of the company's recent quarter. I would have called it a disappointment, but except (from me) not much was expected.

The quarter that was

In the company's first quarter 2012 earnings results it reported revenues of $4.2 billion -- a number that represents a drop of 19% from the previous quarter. RIM attributed the decline to decreased BlackBerry smartphone shipments falling from 14.1 million in Q3 to 11.1 million in Q4, as well as a higher proportion of lower ASP products in the mix. RIM also said that the BlackBerry smartphones continue to sell well into the prepaid and entry-level market, and the Bold 9900 continues to gain traction while certain models of the BlackBerry 7 were not selling as well as the company had anticipated.

The company continues to demonstrate that sales outside of the U.S. are accounting for the majority of its revenue as that number increased by 7% from the previous quarter to register at 68%. Even more glaring was the fact that U.S. sales once again declined in the fourth quarter and represented 17% of total consolidated revenue compared to 20% in the third quarter. If an investor needed further evidence that RIM has lost this battle to Apple's iPhone, this continues to be the evidence. But more importantly, it is how Apple continues to increase its separation from RIM -- in other words, the gap is widening as each quarter passes.

The company reported hardware revenue of $2.9 billion or 68% of sales compared to $4.1 billion or 79% of sales in the third quarter. However, what I found interesting was that its service revenue is doing pretty well as it reached $1.1 billion while representing an increase of 12% on an adjusted basis. The reason this caught my attention is that it has been a route that I have long encouraged the company to take and one that has been long overdue. I felt it needed to discontinue its failing hardware business and devote its attention solely to services -- in particular, it's mobile fusion service.

Focus on service

The argument is, it worked for IBM ( IBM) then why not RIM? But as noted previously, RIM has to be willing to get creative and think beyond the enterprise. Its mobile fusion service is a decent start, but it can yet re-invent itself by again becoming a consumer favorite. The company should think outside the box and inside the car by acquiring satellite radio giant Sirius XM ( SIRI). Although unlikely, it remains an option that I believe would make some sense for RIM. The idea is that it would separate the company from its dying enterprise footprint and further its own BBM Music Service strategy -- one that now has a new $5 a month cloud-based offering.

The service allows subscribers to share songs with fellow subscribers while also allowing users to select up to 50 songs per session, which means the more BBM friends a subscriber has, the more music selections that will be made available to the user via the cloud. This idea has Sirius Synergy all over it, especially considering that RIM's new BlackBerry 10 OS would work wonders for Sirius' new Lynx radios.

Sirius' weakness is innovation and according to RIM's new CEO, the company's "problem" is that it "innovates too much" -- sounds like a marriage made in heaven. It's hard to imagine that this idea would ever amount to more than a pipe dream, but to RIM's credit it seems that its new CEO has started to appreciate the true realities of the company by having made the following statement during the conference call:
"Since I last spoke to you back in January, I undertook a comprehensive internal review to assess the state of RIM's business. I did my own reality check on where the entire company really is. I think as the benefit of going through this process from the vantage point of CEO, it is now very clear to me that substantial change is what RIM needs. I am focused on creating long-term value for this company, and I'm committed to do whatever it takes to deliver on that commitment."

I have to say that I was impressed by this statement and what I felt was a sincere appraisal of exactly where RIM is today. The company now plans to refocus on the enterprise business in an effort to capitalize on its current position in that segment. It admitted that it dropped the ball on the bring-your-own-device (BYOD) movement -- an initiative that Cisco ( CSCO), Hewlett-Packard ( HPQ) as well as Dell ( DELL) as have begun to take significant advantage of by leveraging their respective tablet devices into the enterprise. For RIM, can it seize these opportunities with its mobile fusion? This may yet be its saving grace.

Bottom line

For investors wanting to think that a "new RIM" is on the horizon, I continue to suspect that it is nothing more than a situation of too little too late. The company's once dominance is over and it was the result of its stubbornness of not wanting to adequately adjust its focus from the enterprise and where it truly belonged, on the consumer.

Now that it has come to this realization, it seems the enterprise has already moved on. Corporate IT now has a choice and that choice is to give the employees who also happen to be consumers, what they want. Unfortunately for RIM, what the employees want are Apple and Android devices. For this reason, RIM remains a good short at any price above $10 where unfortunately for some investors winning is not an option and misery still prevail.

At the time of publication, the author was long AAPL, CSCO and held no positions in any of the stocks mentioned, although positions may change at any time.

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