by Charles Sizemore | July 1, 2013 12:40 pm
BlackBerry (BBRY) shares fell off a cliff last Friday, plunging roughly 28% after its first-quarter earnings report indicated that the company’s “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 the company still is leaning 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 might 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 (SSNLF) Galaxy line running Google’s (GOOG) Android operating system. And at the low end, it is getting out-priced by a flood of cheap, entry-level Android devices.
As for the enterprise market — an area I once considered a “moat” for BBRY — 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, during 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 in May 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 BBRY is 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.
And more importantly, Microsoft can afford to throw money at its mobile platform until it gets traction.
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 to $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.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long MSFT. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.
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