BlackBerry Ltd (BBRY) Has Bigger Problems Than the End of BlackBerry Classic


BlackBerry Ltd‘s (NASDAQ:BBRY) “Classic” phone is one of more recognizable smartphones in the market. Therefore, with the recent news that it will be discontinued, one might think that the discontinuation alone has big implications for BBRY stock, but what it really does is shed light on an even greater issue.

BlackBerry Ltd (BBRY Stock) Has Bigger Problems Than the End of BlackBerry Classic

The fact is that BlackBerry has been unable to find any positive sales momentum from hardware. Last quarter it sold a little over 650,000 units, and controls just 0.2% of the worldwide smartphone market according to Gartner.

With BBRY stock down 77% over the last five years, and expectations already at lows, the discontinue should not have much effect on BBRY. However, the move itself illustrates the company’s direction, which could play a role in where BBRY stock goes from here.

The Implications for BBRY Stock

For the time being, BBRY stock is safe. The company has $1.3 billion in net cash and its patent portfolio is largely believed to have a valuation north of $1 billion. That gives BBRY a valuation of $2.3 billion, or nearly 70% of its market capitalization without ever figuring its actual business.

As a result, investors should not worry that it is discontinuing the BlackBerry Classic smartphone is a big deal. The company has already provided its guidance for the full-year, and likely did so with this move in mind. Furthermore, hardware has become such an underperformer than BBRY has really tried to de-emphasize it in quarterly reports.

For example, BBRY is guiding for 30% revenue growth in software and services and positive free cash flow. This is what BBRY is selling to investors. However, analysts expect overall sales to fall 25% over the next fiscal year, a reflection of how bad hardware sales are weighing on the overall business. Hence, the fact that BlackBerry is discontinuing the Classic does not really change the outlook all that much, and is thereby insignificant to its outlook.

The Bigger Picture for BlackBerry

All things considered, BlackBerry CEO John Chen has tried hard to keep the company’s hardware dreams alive. First, he backed BlackBerry’s BB10 operating system, which was believed to be the company’s last big chance to make it on their own. Then, that did not work, and Chen did what no BlackBerry bull would have ever embraced in years past, he turned to Android.

Whether it be the BlackBerry Classic, Passport or Priv, BBRY has done all it can do in hardware, and nothing seems to work. While using Android significantly grows BlackBerry’s apps and its addressable market, the company still can’t steal customers from the likes of Samsung (OTCMKTS:SSNLF), Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) or Motorola among others.

As a result, Chen has said that if BlackBerry can’t succeed in the smartphone space, it will exit. That’s not what Chen wants to do, but the fact that BlackBerry is already discontinuing its products, one that was just reintroduced in 2014, coupled with disappointing sales in its last quarter suggests that BBRY may be headed in that direction.

This Is Scary for BBRY Investors

Some BBRY stock owners have this notion that it would be good for BlackBerry to exit the money-draining hardware industry and focus on maximizing the profits from a software and services business that will top $650 million in revenue by the end of this fiscal year. That may make sense, but the problem is that most services and software users are also BlackBerry users.

Even though BlackBerry’s hardware sales have fallen by 100,000 units sequentially in each of the last three quarters, it still has that niche user base that consumes services and software. If BlackBerry does away with hardware, there is no guarantee that BBRY can sell these products to customers who use other platforms, as there is not enough to support its current growth.

The fact is that much of BBRY’s current software and services growth is likely still tied to hardware. If hardware fails entirely, and software and services become irrelevant, then the outlook for BBRY would look very bad.

At that point, BBRY’s cash burn would likely accelerate and its patents related to BlackBerry hardware and software would devalue. Therefore, losing the BlackBerry Classic does not matter all that much, but what that loss means for the company’s broader direction could have huge long-term implications.

As of this writing, Brian Nichols did not own a position in any of the aforementioned securities.

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