RIM Wars

Sadly, it seems that Canada’s favourite high-tech company is falling behind the technology curve. Both Apple and Google Inc. introduced new smartphones and operating systems to compete head-to-head with RIM. Even worse, the new phones are starting to eat into RIM’s prized corporate market share. And with Apple’s introduction of its tablet iPad device, with an upgrade coming this February, RIM finds itself even further behind the eight-ball.

Of course, RIM is still a very profitable company. Third-quarter revenue of $5.40 billion generated US$1.64 earnings per share, pretty much in line with company guidance. It is also fighting to reclaim market share with its new Torch smartphone introduced this year, and its own tablet device, known as the PlayBook, expected early in 2011, along with a new operating system, which will power its smartphones as well.

To that end, RIM’s share price has climbed in the past three months. The question is whether the company can maintain the momentum, given that price wars for cheap Internet-enabled smartphones are likely to break out next year. Not to mention, the tablet wars – where Apple is firmly entrenched on high ground – which are just getting started.

How RIM fares in 2011 will depend on what metric traders focus on. RIM is a leader in one of the fastest growing segments of the market. Which means it could lose market share and still produce above average profit growth.

However, longer term, declining market share will have serious long term consequences as the mobile space matures. That is not to suggest that RIM collapses. But without remaking itself, the performance of RIM could begin to look a lot like the last ten years for Microsoft.

Of course, no one really knows if RIM’s Playbook can compete against the Apple iPad. Or whether its’ new operating system can change metrics within the industry effectively hedging RIM’s market position.

At a minimum, RIM shareholders (or those thinking of being a Rim shareholder) should consider buying a little protection. Especially at a time when option premiums are relatively cheap.

If you are a more aggressive bear on RIM, buying puts is an interesting strategy. Say the RIM March 60 puts at $4 per share. Another possibility is bear call spreads. Selling say, the RIM January 60 calls (recent price $3.20) and buying the RIM January 64 calls ($1.40). The net premium received from this bear call spread would be $1.80 per share. If the stock is below $60 per share at the January expiration, you would retain the $1.80 per share premium received as both RIM calls would expire worthless.

Having said that, aggressive traders should follow RIM’s trading patterns on Monday, before jumping into any trade. I say that because after RIM’s earnings, traders will be jockeying for position and that could take a couple of trading days to work itself out. As such, you may find better prices on the aforementioned trades; like say, a $2.00 or better credit on the RIM bear call spread, or a $3.70 or better price for the RIM March 60 puts.

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