RIMM: National Bank Cuts to Hold; Pause in the ‘Product Cycle’ Rally

The Street today continues to reflect on what may be in store for Research in Motion‘s (RIMM) fiscal Q3 report, due out Thursday afternoon.

The Street is modeling $2.65 billion in revenue and a 36-cent net loss per share for the three months ended in November. Net loss drops to 27 cents if one excludes stock options expense.

RIMM shares today are down 26 cents, or 1.8%, at $13.67.

Today’s dispatches are customarily downbeat, the one most so coming from National Bank Financial’s Kris Thompson, or who cut his rating on the stock to Sector Perform from Outperform, while maintaining a $15 price target on the stock.

Thompson is worried that the recent run-up in RIM stock, based on the the retail introduction of the “BB10” operating system next month, may take a breather while investors digest tomorrow’s results:

RIMM�s stock move over the past three months is product cycle driven. Check out RIMM�s move vs. Apple (AAPL) over the past three months. RIM is entering a material product upgrade cycle. Apple seems to be exiting a strong iPhone cycle; the iPhone 5 is a big let-down vs. previous models. If RIM delivers with the BB10 the stock should move higher; otherwise it�s likely back to US$6. It�s a good time to take some profit ahead of the quarter; we expect a lower entry point is coming. Investors are looking for reasons to sell this stock after such a huge rally. Short interest is at an all-time high (near 25%), RIM�s market share is falling in most countries, the BB10 will require a huge launch hinging on many important partners, RIM�s enterprise base is still months away from a BES 10 upgrade, hardware margins are under pressure across the industry, and RIM�s value-added services fees are under pressure. We still like the product-cycle investment thesis but would wait for the quarter.

Thompson foresees three possible outcomes for tomorrow’s report, based on his belief that “cash is king” as the company heads toward BB10, and the number of subscribers RIM has retained is also important, though somewhat less so than cash:

(1) Cash burn is neutral, sub base increases; stock goes higher.

(2) Cash burn is higher than expected, sub base declines; stock goes lower.

(3) Cash burn is neutral, sub base declines; stock is flattish.

Thompson’s guess is the sub based loses a million in churn, ending at 79 million, on sales of 6.2 million BlackBerrys last quarter, though he does think it’s possible RIM could surprise him and add a million subscribers. He models average selling price dropping to $200 from $229 and gross margin being “under pressure.”