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RIM Still Well Short of Being a Buy

Company's future outlook too dim for long-term investors to seriously consider


RIM blackberry tablet

Research In Motion’s (NASDAQ:RIMM) slow-motion train wreck picked up speed last week after the company reported disastrous second-quarter earnings and offered a weaker-than-expected outlook. Its shares dropped nearly 19% on Friday, bringing its forward P/E below five. But is it a buy?

Unfortunately for RIM bulls, the answer still is no. The company’s failure to adapt is reflected in accelerating market share losses, and there seems to be little ahead to turn that trend around. Its QNX operating system, currently on the PlayBook tablet and slated to be added to RIMM’s phones next year, is cited as one potential catalyst. Still, it’s difficult to see consumers becoming excited enough about this change to stabilize RIM’s market share.

What’s more, the PlayBook itself was supposed to be a catalyst, but instead it has turned into an outright disaster. The company shipped just 200,000 units in the quarter. This number is bad enough on the surface, but it’s even worse when you consider that Apple (NASDAQ:AAPL) shipped 9.2 million iPads in its most recent quarter. Looked at another way, that’s about 101,000 per day. At that rate, Apple equaled RIM’s PlayBook sales on the second day of the quarter — before many investors had even gone to bed for the night.

Another frightening consideration is that RIM barely sold more phones (10.6 million) than Apple sold iPads. And now, it looks like the company will have to cut prices on its PlayBook — a move that will put even more pressure on its already declining margins. Clearly, RIM is on the outside looking in.

Some potential catalysts could drive RIM shares higher, but unfortunately, none of them involve innovation, rising market share or organic growth. The most frequently mentioned positive regarding Friday’s news was the company now could be taken over, but that seems like a long shot. With a $12.5 billion market cap, RIM is a large pill to swallow — especially now that it appears to be operating on the proverbial “burning platform.” In addition, buyers might think twice about RIM after Hewlett-Packard’s (NYSE:HPQ) catastrophic purchase of Palm.

A management change also is a possibility, and the shares certainly could see a pop if a shake-up provided renewed hope for RIM’s future. There is a recent precedent on this front: Carol Bartz’s firing at Yahoo (NASDAQ:YHOO) has been worth a 16% jump in the stock in the eight trading days since the news of her departure.

Add it up, and the negatives for RIM continue to outweigh the potential positives. Even at 4.6 times forward earnings, the company’s questionable leadership and lack of a true catalyst for growth indicates that RIM remains a value trap.

Even with its horrendous outlook, however, RIM is no longer an easy short. Its valuation is too low, and investor expectations already have reached rock-bottom levels. In the short term, the stock could very well drift to its prior low of $21.60 from its Friday close of $23.93. But with potential positive surprises — either a management shakeup or a takeover — lurking in the background, it isn’t worth the risk to try to wring out the extra point or two of downside with the stock already off 70% from its February high.

The bottom line: While RIM remains an attractive trading vehicle with its beta of 1.34, there’s no reason for a longer-term investor to buy it even now. Unless something happens to change the RIM story, leave this stock alone.

Article printed from InvestorPlace Media,

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