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Friday, January 06, 2006


RIMM Breakout from Trading Range

Research In Motion (RIMM) sells the BlackBerry wireless e-mail device. They are in a patent dispute with NTP Inc. regarding some patents NTP has on email access. NTP tried to force the RIMM service to be shut down, and for weeks that attempt got highlighted on CNBC and other media outlets, with lots of hype about what happens if/when the BlackBerry service gets shut down. Meanwhile, the patent office release non-final decisions rejecting the validity of all 5 of NTP's patents. NTP's case, which has been in court for 4 years and got them a $480 million settlement offer from RIMM a few months agao, has been weakened by the patent office's decisions. Before these patent office rejections, NTP won a trial against RIMM in 2002 and rejected the $480 million offer, wanting more. In addition to the hype about RIMM being shut down, there have been various rumors of RIMM and NTP settling for $1 billion or more. To put this in perspective, $1 billion is equivalent to about $5/share, yet RIMM has sold off from a high over $100 on fears about the NTP case.

On December 21, RIMM "reported a stronger-than-expected 33 percent rise in third-quarter profit on Wednesday, as sales jumped on surging demand for its popular BlackBerry wireless e-mail device." The report "calmed investor fears that the company's patent fight with NTP Inc. was causing major customer losses." "In spite of all this noise, customers are still definitely buying in North America, and they're really, really buying internationally," RIM Co-chief Executive Jim Balsillie said.

Despite its relatively high price and market cap, RIMM is not an expensive stock, trading at a forward PE of around 20 on expected long-term 20% growth. If the NTP case gets resolved, that would remove lots of uncertainty from RIMM customers and should increase their numbers. In addtion, lots of inexperienced short sellers have sold RIMM short, expecting the service to be shut down based on all the media hype. These short sellers will have to buy back to cover their short positions, helping to force the price higher.

In the worst case, if the court rules that RIMM has infringed on NTP's patents and can't use email like they currently do, RIMM says they have a workaround that will keep it in service.

With RIMM breaking out of its recent trading range and closing at a 3-month high of 69.19, over its 200-day exponential moving average, it looks ready for a rally and short squeeze to higher levels.

What about the fact that Nokia and other wireless makers are soon to compete head to head with Rimm and offer the same product without a monthly fee and they also make the devices cheaper. Could that be the real reason that pros are shorting this and not because of the trial like you foolishly think? In the long run this thing returns to single digits.
Based on yesterday's 9-point squeeze to multi-month highs on news the judge declined to order an injunction to shut down BlackBerry service immediately, it seems pretty clear that lots of amateur shorts had shorted the stock because they expected such an injunction. A sharp rally that fast indicates lots of short panic covering. The pro shorts would have waited for this squeeze of the amateur shorts before shorting RIMM. They would not have been shorting with the amateurs ahead of the trial news. Whether our thinking that the trial news would produce a short squeeze was foolish or not, it was accurate.
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