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Well, that was a wild ride. Before releasing fiscal 2013 Q3 earnings, Research In Motion (NASDAQ: BBRY ) had been flying high, peaking at more than $14 a share the end of last week. Then the other shoe dropped; at least for a while. The sell-off following RIM's earnings announcement was huge, with nearly three times its daily trading average of 50 million shares changing hands.
Unfortunately for RIM shareholders, all that trading activity resulted in a precipitous 30% drop in share price. By Dec. 24, RIM's share price had fallen to $10.61, well off its $14.12 pre-earnings closing price. Then, to really make things confusing, investors got back on the RIM train, pushing its stock up to nearly $12.
What's going on here?
The week that was
RIM entered the week on a high -- a BlackBerry 10 high, to be precise. As news of its new and improved OS was digested, investors just couldn't get enough: BB10, after all, is touted as RIM's salvation. Though the announcement of BB10's worldwide Jan. 30 release was made in early November, investors were still giddy over the news, and rightfully so. With several new features, and early beta test rumors mostly positive, BB10 warranted all the positives -- or so it seemed.
RIM's fiscal Q3 results shouldn't have come as a surprise. With BB10 pending, and CEO Thorsten Heins in the midst of implementing RIM's strategic shift to a focus on the commercial smartphone marketplace, earnings expectations were relatively minimal. Not to mention that with so much hullabaloo surrounding BB10, potential new RIM customers were expected to hold off on purchases, waiting on the new OS.
With that said, most of RIM's Q3 news fell right in line -- units sold were down, as expected, to 6.9 million in the quarter, and revenues took a hit, too. The earnings loss? RIM's earnings shortfall was less than most analysts' expected, so why sell-off? Most RIM followers attribute the drop in share price to Heins' comments regarding service fees, or lack thereof, going forward.
As Heins put it, fewer BlackBerry end-users will result in "less or no service revenue in the future." That's particularly painful to hear, as RIM's service fees are easily its highest-margin, most profitable source of revenue. So, naturally, investors sold RIM shares as if they were on fire.
Then a funny thing happened
If you're a RIM aficionado, the trading days following its post-earnings sell-off should give you a warm, fuzzy feeling all over. Why? Because immediately after its dramatic drop in share price, RIM investors swooped in and bought at a discount, boosting the stock up near the $12 range. In other words, the negative reaction to Heins' "service fees" news was overdone, and bargain hunters jumped all over the short-term opportunity RIM offered.
Even news of RIM's patent litigation loss to Nokia (NYSE: NOK ) couldn't put a damper on investor optimism. Rumors regarding the amount of RIM's payments to Nokia were all over the board, some suggesting an initial fee as much as $150 million. But according to its recent SEC filing, RIM's first payment to Nokia will be a "mere" $65 million. After last quarter's jump in cash reserves to more than $2.9 billion, the payment to Nokia won't make much of a dent on RIM's balance sheet.
If you're in search of a rational reason for RIM's wild ride this past week, I'm afraid you'll be disappointed. The market overreacted (yeah, there's a shocker) to RIM's earnings announcement and Heins' "service fee" statement. It happens. On the upside, investors saw RIM as a bargain in the $10.90 to $11 range, and that's a positive sign for shareholders leading up to the Jan. 30 BB10 unveiling.
When it's said and done, nothing's really changed for RIM or its shareholders, in spite of all the noise. The challenge remains staying relevant in the ultracompetitive mobile-phone market, even as the monsters in the industry -- Apple (NASDAQ: AAPL ) , Samsung, and Google (NASDAQ: GOOGL ) -- continue gaining market share in RIM's house, the commercial market.
Unseating the iPhone, Galaxy, or Nexus is no easy task, with or without BB10. But RIM's strong balance sheet gives it an important advantage: time. Time to ride out market overreactions like this past week, and, even more importantly, time for BB10 to gain traction.
Like RIM, Nokia's been struggling in the world of Apple and Android smartphone dominance. Also like RIM, Nokia's banked its future on its next generation of Windows smartphones. Motley Fool analyst Charly Travers has created a new premium report that digs into both the opportunities and risks facing Nokia to help investors decide whether the company is a buy or sell. To get started, simply click here now.