BlackBerry ($BBRY) shares fell off a cliff on Friday morning, down more than 25% after 1st quarter earnings were released, and through mid-morning on Monday they hadn’t recovered much. It appears that the “make or break” BB10 operating system is looking like more of a break than a make.
BlackBerry sold 2.7 million BB10 devices in the quarter…which was about a million short of Wall Street estimates. And BB10 phones made up only 40% of total phone sales…meaning that the company is still having to lean heavily on its older, lower-margin models to keep volumes up.
When a stock loses a quarter of its value in one day, it’s tempting to go bargain hunting. After all, this is a company with half of its market cap in cash trading for just 57% of book value…a book value that may be understated based on the value of BlackBerry’s patent portfolio. And after a rout like this, surely all of the bad news is already priced in, right?
If you want to play a dead-cat bounce here, be my guest. But view this for what it is: a short-term contrarian trade and not an investment.
Let’s step back and consider BlackBerry’s plight. The company has sunk into that nightmare scenario of being “stuck in the middle.” Its high-end phones are not selling well vs. Apple’s ($AAPL) iPhone or the top-line Samsung Galaxy line running Google’s ($GOOG) Android operating system. And at the low end, it is getting out-priced in both developed and emerging markets by a flood of cheap, entry-level Android devices.
As for the enterprise market—an area I once considered a “moat” for BlackBerry—BlackBerry’s device management still remains one of the best options. But this clearly hasn’t arrested the decline of handset sales, and the company’s overall subscriber base is falling. Meanwhile, government and corporate clients who once valued the security of BlackBerry’s network have over the past five years of subpar product offerings found ways to accommodate iPhones and Androids.
Sadly, BlackBerry’s network infrastructure—once the envy of the mobile world—has now arguably become as much of a liability as an asset. Remember that week in 2011, when BlackBerry’s network went down? That was a turning point for many buyers for whom the “reliability” of the network was a selling point. By today, BlackBerry has sunk so far in terms of relevance, a major service outage earlier this year barely made the news.
So, BlackBerry’s captive enterprise customer base continues to shrink even while its handsets are bombing with the general public. This would be a tough situation for any company, let alone one in a fast-changing industry dominated by fickle consumers. And when you consider that they are fighting for third place with a newly-assertive Microsoft ($MSFT)—one of the biggest and best-capitalized companies in the world –BlackBerry’s chances of success get even slimmer. Microsoft, though still a small player in mobile, can offer a phone that complements its ubiquitous Windows PC operating system and the expanding Microsoft ecosystem. Microsoft can also afford to throw money at its mobile platform until it gets traction…even if it takes years. BlackBerry cannot.
This is all a long way of saying that, while appearing cheap on paper, BlackBerry is not an attractive investment. It is a value trap that gets weaker with each passing quarter.
At some point, BlackBerry would be worth buying for its cash and patents alone. At, say, $5-$6 per share, a corporate raider could potentially buy the company, chop it up, and sell it for spare parts at a handsome profit—assuming Canadian regulators let that happen. Or, a larger tech company could buy BlackBerry and absorb it.
But at today’s price, investors face the prospect of watching management destroy more value trying to resurrect a company that is past the point of fixing.
If you’re a short-term trader, you can try your luck at playing a dead cat bounce. But longer-term investors should stay away.
Sizemore Capital is long MSFT.
