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How About a Microsoft and Research in Motion Partnership?

I believe that in June 2009 the smart money started putting the pieces together.  It was the first of a string of disappointing earnings calls for Research in Motion (RIMM). Since then, its stock price has been sliced in half.  RIMM’s shareholders believe that the sell-off has been overdone.  The company itself believes that as well and announced a share buyback plan at it earnings call in June. I love Fred Wilson’s take on buybacks (Why I don’t like Buybacks).

Personally, I believe the street has it right.  Due to Apple and now Android based phone dominance at the high end, RIMM’s growth has been regulated to the emerging markets.  This is a thriving and growing market, but it is also very cost sensitive.  The combination of selling fewer high end devices and more devices in cost competitive countries has led to a rapidly declining average revenue per device.  Last time I checked, Wall Street doesn’t reward high multiples to companies that can only grow by cutting prices.

It is grim in Research in Motion land, but it could be worse.  Many investors remember another Canadian tech giant Nortel.

Nortel was a dominant Canadian Telecom company.  In its glory it employed well over 90,00 people and its market capitalization accounted for more than a third of the total valuation of the Toronto Stock Exchange.  Nortel was one of the most spectacular casualties of the internet bubble. From September 2000 to August 2002, Nortel’s stock price plunged from C$124 to C$0.47.

RIMM’s stock price slide will not reach “spectacular” levels, but its descent will continue until there is a significant strategic shift at the company.  Here is my prescription for preventing the Nortel’ing of another Canadian giant.

  1. Concede the consumer market to Apple and Android.  As RIMM attempts to compete in the consumer market it is slowly losing its bread & butter enterprise customers.  Enterprise is not sexy, but it is profitable.
  2. The enterprise is under tremendous pressure to start supporting Apple and Android devices.  Stopping the bleeding will not be as simple as redirecting resources from consumer to enterprise, but it will help.  Cisco just announced a tablet device targeted towards business users.  RIMM’s mission should be to dominate all mobile devices in the enterprise space.
  3. The following solves a multiplicity of problems because Microsoft needs this as desperately as RIMM.  Partner with Microsoft to deliver its next generation OS.   Microsoft’s Windows Phone 7 is the “Field of Dreams” of software – if we build it they will come. As Win Phone 7 is being positioned – there is no need for it.
  • Android solves the problem for mobile device hardware manufactures without OS expertise.  Why would HTC or Motorola need a phone running Android and Win Phone 7?  Add in the fact that Android is free and there will be a cost associated with Win Phone 7; Win Phone 7 is a dead man walking.
  • A better approach would be for Microsoft to do a exclusive deal with RIMM to provide their OS.  This addresses two problems: Win Phone 7 has a problem to solve and RIMM has a next generation OS.  Also, both companies are strong in enterprise and could possibly find other areas of synergy to exploit.
  • There have been many calls for a Microsoft buyout of RIMM.  I won’t happen.  First, the failed Yahoo buyout attempt is too fresh on Microsoft’s mind. Secondly, RIMM would be just as bull headed as Yahoo if not more so.  Mike Lazaridis, RIMM President and Co-CEO, founded the company.  This is his baby. He ain’t selling.

If this were to ever happen, which I doubt,  it is at least a year away.  First, RIMM’s next super phone, to be released this summer, must fail.  Apple could easily seal that fate by announcing an iPhone on Verizon.  Secondly, Win Phone 7 must fail.  Since it is not scheduled for release until Christmas and if they kill it as fast as the Kin – we are looking at March 2011 wake.

That sets us up for a blockbuster partnership announcement next summer. Now if only Apple and Google will stop innovating while this materializes – all will be well….

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AT&T Joins the List of iKIllers

I could only chuckle a few months back when a guy called me an Apple Fanboy.  I am sure that many who have read my blog or tweets have thought this in the past, but this guy called me out.  Well – the facts are the facts. From 5/31/07 to 5/31/10, Apple’s stock is up 114%, while other mobile giants pale in comparison:  Research in Motion 9.6%, Google -2.5%, and Nokia -59%.  Apple Fanboy? “Money Making” Fanboy is more like it.

Mobile phones are very personal devices.  I believe that cellphones are as much as an expression of a person’s personality as the clothes they wear.  This close identity can become an investors achilles heel.  Research in Motion is a great company.  They make great phones, but the stock is down 27% over the past year. Unfortunately, it is difficult for many to separate the company from the stock. Love the phone, but hate the stock.

My “Long Apple Short iKillers” investment thesis strikes a nerve, because it is critical of many cellphone makers. Nokia, Research in Motion, Motorola, Google – I’m negative on all of them. Subpar crippling services like Adobe’s Flash, puts you on the list.  Matter of fact, I am finding it easier to find companies struggling with the transition to mobile than ones striving in the new paradigm (The Long Apple Short iKillers Trade is Working).

The buzz this week has been AT&T’s new data pricing plan.  It is replacing its unlimited plan with a tiered pricing plan.  My Twitter buddy Leigh Drogen has written an excellent analysis of the situation on his blog (It Was Inevitable).  Regardless of AT&T’s spin, it looks like prices are going up.  At the very least, usage patterns will be modified.

As consumers we always begrudge higher prices, but providing wireless services is a capital intense business. So, the higher prices may be justified.  That being said, the beauty of capitalism is that mispriced  services become an opportunity for someone. AT&T is already on shaky grounds with its questionable service quality.  My hope is that a creative company will come in and shake up the data delivery business.  Who is that company?  I have no idea, but AT&T is truly a company struggling at the transition – the definition of an iKiller.

Another great week for the Long Apple Short iKillers (LASiK) strategy.  Last week, LASiK was up 1.1% while the market was down 2.3%.

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The Long Apple Short iKillers Trade is Working

To the dismay of Google and Research in Motion fans, my “Long Apple Short iKillers” trade is working.  If you are not familiar with this trade read “How I am Playing the Smartphone Craze” to understand its origins.  The thesis of the trade is derived from a quote from the Morgan Stanley Internet Report “New Companies often Win Big in New Cycles while Incumbents Often Falter.”  “Long Apple Short iKillers” is a literal implementation of that statement.

The trade is composed of two components.  First, “new companies often win big in new cycles.”   Although Apple is not a new company – most analyst agree that mobile computing began with the release of the iPhone in June 2007.  The company’s fresh perspective has simply caught the Nokias of the world flat footed.  “Long Apple” is my metaphor for new companies in mobile computing.

Apple is currently the sole member of “Long Apple”.  I expect to add other companies over time.  However, as an individual investor I don’t need a ton of stocks to express a view.  I don’t anticipate this trade (long and short side) to ever having more than eight stocks in play at one time.

At some point in this cycle another disruptive mobile device maker will emerge.  Many people believe Google is that company.  I choose to disagree (“Will Google be a Major Player in Mobile”). I expect other components of the “Long Apple” part of the trade to come  from the mobile infrastructure development and applications space (reference my article “For Investors the Smartphone War is Over”).  As I become more comfortable with these companies, I will add them to the trade.   Some potential companies are highlighted in the data below.

The second part of the Morgan Stanley statement, “while incumbents often falter,” was my Eureka moment.  I live in Massachusetts and saw Digital Equipment Corporation, a powerhouse in mini-computers, die.  Their CEO couldn’t imagine a world where people would want PCs in their home.  Since I lived through that era and saw many friends lose jobs – the Morgan Stanley statement had a profound impact on my thinking.

Interestingly, we are watching the statement play out each day.  Once dominant companies are announcing new management structures and product plans.  It is unlikely that an announcement can make up for their lack of vision and lost time.   Unforunately, some beloved companies will pay the ultimate price.  A few weeks ago we saw Palm bite the dust.  I plan to profit from this natural course of business and have dubbed this part of the trade “Short iKillers.”  Read “The Four Mules of Mobile” for more insight.  The charter members of the “Short iKillers” are Adobe, Motorola, Nokia and Research in Motion.

I believe that we are 3 years into a 10 year cycle.  So, Apple haters – this will not be a 7 year love fest.  Its doubtful that Apple will remain a favorable investment over that entire time span.  The same is true with the iKillers.  The initial charter members will not be perpetual shorts.  My plan is to be flexible and open minded.  When the data changes I will change.  The ultimate goal is to make money.  Lots of it.

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Below are model portfolios designed to help communicate my thinking and measure the success of the strategy.  I use May 6, 2010 as the inception date for tracking purposes.  It is the date that I published the post “The Four Mules of Mobile.”  It’s also same date that I discussed this trade on StockTwits TV show “Talk Your Book.”   Interestingly, it is also one day after Investors Business Daily confirmed that the market was in correction.  So, the strategy has performed well even in a down market.  Finally, the year to date results are consistent with the results from 5/6.  So, for the conspiracy theorist, May 6 is not a convenient date to support my point.

Long Apple Short iKillers A (LASiK A)

Notes:

1) Results are Since 5/6/10, the date “Four Mules of Mobile” was published.

2) The portfolio is 50% “Long Apple” and 50% “Short iKillers.”  Thus, each iKiller constitutes 12.5% of the trade.

3) Short iKillers – Shorting stocks is a challenge and even more so with the stocks in this portfolio.  These stocks are extremely volatile and are subject to buyout rumors and analyst upgrades.   Although my intent is to stay short during this entire trade – it is not that simple.  There will be times when entire market is rallying and I may not wan’t to be short.   In my real trading account, I am using Put options to clearly define my risk.  Also, since options expire –  I am using short holding horizons ( a couple of days to a couple of weeks) to stay short.  This week I made another subtle tweak – the idea is to short when a stock becomes overbought and then cover when it becomes oversold.  Then re-short when it becomes overbought again. That’s much simpler to say than to do.  As time progresses, I hope to find an easier way to express this part of the trade.

Long Apple Short iKillers B (LASiK B)

Notes:

1) Results are Since 5/6/10, the date Four Mules of Mobile was published.

2) The portfolio is 50% “Long Apple” and 50% “Short iKillers.”  Thus, each iKiller constitutes 12.5% of the trade.

3) This portfolio is to measure the effectiveness of shorting larger stocks that are not subject to buyout rumors.  This is purely a tracking portfolio at this point.  Hopefully, it will prove to be a better approach than playing with options and trying to time the trade.  I may switch to this approach at a later date.

4) Ericsson:  Over the next 5-10 years the telecom industry will be undergoing a massive infrastructure overall to 4G technology.  This will provide the ubiquitous high-speed wireless connectivity necessary to make mobile computing a reality.  There are only a handful of companies in the world that have the technology to provide an end to end solution.  The big three are Ericsson, Alcatel-Lucent and Nokia-Siemens.  All three have significant problems ranging from merger integration problems to recovering from the Telecom spending slow down due to the 2008 recession.  Alcatel-Lucent would be the ideal short in the group, but the stock is current trading for a little over 2 bucks.  If they ever do a reverse-split – they will be added to the iKillers in a nanosecond.

5) QualComm: I have added QCOM to the iKillers list mainly to watch them.  I don’t know them as well as the others, so this is a way to keep them on my radar screen.  I do know that they had a dominant patent portfolio in 3G technology, but I am not certain how well positioned they are in 4G.  Also, QCOM is a large company.  I have a feeling the best shorts will be company that are free from the buyout chatter.

Watch List:

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Google Will Learn that Open Ain’t What It Used to Be

Google really kicked up the rhetoric this week openly declaring war on Apple.  However, what Google, Microsoft, and rest don’t understand is – it is not about having a front facing camera, multi-tasking or any other “do-hickey” the haters scream about.   It is the total “Experience.”  When I received my iPad a few days ago, I sent an email to my buddy informing him.  He sent me an email back saying “Welcome to the family.”

Mobile computing will not play out like desktop did 25 years.  It just won’t.  Everyone from the users to the producers are more savvy.  Google is attempting to play off the open versus closed debate and in my opinion it will be their down fall.  This morning’s New York Times article “The Death of the Open Internet” should at the least stimulate some discussion at the Googleplex.

I’m more technical savvy than many – my first job required that I learn UNIX.  So, I can hack around when necessary.  However, when I have to continuously re-install a printer driver for whatever reason or when Quicken refuses to connect to my bank account and Google search after search provides no solution; my acceptance of Apple’s “so called” closed environment becomes more appreciated.

My last gig in corporate America was selling software to engineers designing semiconductors.  It would always kill me when the front line engineers whined about the cost of our software.  They just didn’t get the big picture, but their management understood the productivity gains the software provided.  Apple products are more expensive.  However, when you take in consideration total cost of ownership (i.e. fewer Google searches for work arounds) Apple wins.

Curation is one of the hottest buzzwords floating around now.  According to Wikipedia, a curator makes decisions regarding what objects to collect, oversee their care and documentation.  This is becoming very important in the digital world.  Countless hours are wasted sifting thru useless information.  Trusted curators gathering and delivering the most pertinent information are quite valuable.   As much as the haters whine, this is exactly what Apple is doing with their app store.  Apple customers get the total cost of ownership story.  Open ain’t what it used to be.

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Long Apple Short the iKillers

I’m long Apple and short any company claiming to have a iPod, iPhone or iPad killer.  That includes practically every gadget maker on the planet.  I have quoted the following so many times I can almost repeat it in my sleep, “New Companies often Win Big in New Cycles while Incumbents Often Falter” – Morgan Stanley.  Apple turned the mobile industry upside down with the release of the iPhone in 6/07. All of the incumbents have been scrambling since that day.

Google has gotten a lot of pub from a NPD Group survey this week.  It claims that Android OS has edged out Apple’s OS for the number two position behind RIMM in U.S. smartphone market share.  Obviously, Apple has a different take:

This is a very limited report on 150,000 U.S. consumers responding to an online survey and does not account for the more than 85 million iPhone and iPod touch customers worldwide, said Apple spokeswoman Natalie Harrison.

Yes, I believe Android is a viable alternative to the iPhone OS. Yes, I believe there are some cool phones running Android.  That being said, I have no interest in buying Google’s stock until it can prove that it can make money giving away Android.  The “freebie” model is great for startups, but I believe that a company with $165B market cap should be able to create products that people are willing to pay for.  I would be more interested in Google if it pursued a merger with Sales Force (Google: Just Buy Salesforce Already!).

iKillers in the News this Week:

Note: My stock positions change frequently. I may or may not be currently long or short stocks mentioned in article.  Follow me on Twitter, to stay current with my latest views.