Long/Short Opportunity - RIMM v GRPN

Even considering the vastly different business models these two companies I cant imagine why under any scenario should Groupons equity be worth more than RIM. According to the current prices Groupons equity is worth something like $13b while RIM’s is worth a below $8b. Am I missing something here?

Groupon is a company that hasnt earned a single cent for its shareholders while increasing their ‘Sales’ figures by a phenomenal amount. These sales seem like a total sham, most of which goes back to the businesses that offer the deals. I dont know how Groupon plans to make a margin when the businesses that offer the deals are probably just breaking even on those offers. The market obviously assumes this company is going to be wildly profitable in the future but I can’t see a basis on which to justify this assumption.

On the other hand we have RIM. According to data from google finance the company is selling at 3X TTM earnings and returned about 40% on equity last year. I agree that RIM is now lagging its competitors in the smartphone and tablet market but I still see Blackberries as being the preferred instrument for work based communication - a market I think it will hang on to in the future.

If someone can provide a sound logical argument for why this discrepancy exists, I would love to hear it.

its not really a discrepancy…RIM is losing market share with shrinking margins…groupon is a growth stock with earnings expected to rise. most PMs already got out of their RIM positions and are unlikely to get back in unless something materially occurs…

What’s your catalyst that’s going to unlock this discrepancy?

Agree with Frank… RIM just looks to me like another company that squandered huge advantages. I’m not buying that. I’m not buying groupon either. In fact, I don’t even know what Groupon does for a living…

FrankArabia, I get there are expectations about groupon but they are wildly overstated dont you think. It doesn’t really have a product as such and pays out most of its ‘sales’ back to the businesses it markets deals for. Even if they do attain a scale that diminishes their fixed costs, the potential margins seem to me to be mostly illusory. RIMM may be losing market share and margins might be shrinking but hasn’t that already been priced in to a large extent. It stocks has halved over the past few months. Still at this point there is not reason why Groupons equity should be worth 60% more than RIMM

Palantir, I was thinking of this more of a simultaneous long in RIM with a short in Groupon. At some point the market will realise Groupon is a useless business and dump the shares. On the RIM side, I think that going long at this price is much less risky with the 50%+ thrashing the shares have already taken. My investment thesis is that Groupon will fall much more than RIM i.e. its an arbitrage opportunity.

I think that to some extent, the reduced expectations Blackberry has may even affect the sales. It’s almost like a bank run. I mean, if people all think that Blackberry will be dead in 2 years, perhaps there will be less demand to buy it. However, you could still be right in your thesis. Why not play this with options instead of an outright position?

there are plenty of stocks with wildly inflated expectations AMZN, Linked In, Groupon, most of the Canadian REITs, Netflix etc…its just the nature of the market…some stocks are cheap, especially the ones i bought haha… rim is an example where when it hit 25 (at 5p/e i think) ppl thought it was cheap, but that was before the bigger guys unloaded…afterwards, everybody but value guys were jumping in on it with the same arguments you have posted. …all of their new devices have flopped in the past 1.5 years…mergers are more remote than 12 months ago given MSFT and GOOG already busted their nuts… i just dont’ want to get into a business where its future is so uncertain despite being cheap quantitatively…i rather buy into some beaten up old economy European biz…

Aren’t typical long-short pairings both within the same industry to reduce risk? I don’t see how these pair up at all, other than the thesis that they are both companies with dismal prospects: GRPN is in a business with intense competition and few barriers to entry, while RIM is rapidly losing market share and is at high risk of becoming a dinosaur. From a pure valuation standpoint, RIM is probably more attractive, but I think there’s a good reason for its low valuation.

+1 Here’s my play: Short them both and go index long. More and more firms are moving towards security software on people’s personal phones (even iphones) which sounds like a negative “g” to me. I wish I was allowed to short for my personal account. I was pitching a RIMM short back in Feb for fun and my collegues thought the trade was over then.

I’d be careful of shorting non-huge cap companies, especially RIMM in this case. Sure its business is spiraling downward, but recently IP has been a mobile tech buzzword for a reason- see Motorola, Palm, Nortel, etc. If you think it’ll drop I’d use puts or a put spread otherwise if you get levered to a pairs trade and find one morning RIMM acquired at a 50% premium you’re in trouble. Personally I’m staying on the sidelines, but at a certain point even shrinking margins and market share hit a point where valuation is attractive. At a PE of ~2 you’re basically assuming their profits will erode so sharply that they’ll be toast in under 5 years, and even with all the downward revisions estimates still look for $1/quarter for the foreseeable future. That said has anyone seen a PlayBook in the wild??

FrankArabia, That was exactly what everyone thought about Apple pre 2000 i.e. that its future is uncertain and that it was going to go bankrupt soon. Also, think about RIMM in relative valuation terms across time periods. In 2008 the market valued RIMM’s growth prospects at $170 per share because of its apparent increasing market share and earnings growth. Although the company was earning less than half of what it is currently it was still valued at about 50x earnings or 12x the price you’d pay for it today. How is RIMMs future more uncertain than it was in 2008? In fact I think today the probability of its existence and financial stability is much higher than it was 4 years ago.

You can only make that comment about apple because you know how it turned out. Not sure which kind of bias that is! The same strategy wouldn’t have worked for Yahoo. What you need to remember is that in tech, your future is always uncertain, especially if you’re small and have one dominant product. If they’re losing market share, then what exactly is RIMM going to do to bring back their former position? It seems like you’re falling into the trap of liking a stock simply because it is undervalued.

Palantir, I am smart enough to know that companies like apple are the rare exception but also assuming that RIM will be out of business in a couple of years is going to the opposite extreme. That was my point. The main point of my argument is that at 170 with half current earnings it was considered a better bet than it is today when its earning double the amount and selling for 15.

apple is a rare example…i wouldn’t place a bet based on rim somehow hitting a homerun…

I agree but im not looking to make 100x on my money 20% will do

i don’t know anything…good luck with your decision though…may the classy babes be with you.

ubermensch/Frank, just out of curiosity, what do you guys do? (Apart from hot classy babes). I’m at an RIA.

I am part of the commodity research and risk management team for a foods company, so not really a financial services firm. Find equity research quite interesting though.

i am ER. I wish i got hot classy babes. not happening.