BlackBerry: Ignore The Noise And Take Advantage Of The Volatility

| About: BlackBerry Ltd. (BBRY)

On Friday, BlackBerry (NASDAQ:BBRY) saw an ugly intraday reversal on the same day that their new flagship phone was released in the United States. Various news reports such as this one, as well as Seeking Alpha articles, reported on the apparent lack of enthusiasm as a result of no lines at stores. Additionally, on CNBC an interview with BGC analyst Colin Gillis made waves. Mr. Gillis dismissed the new phone and said it would not be enough to turn the company around and reiterated his $7 price target on BlackBerry. Seemingly due to these reports, the stock at one point dropped about 13% from its daily high on Friday. The end result was a drop of about 8% from the prior day with the stock ending at $14.91 on Friday.

If you attribute the selloff to the news reports of a lack of enthusiasm for the US launch then this could present an investing opportunity. This article will recap why one day of news does not impact the long term outlook for the company. In addition, implied volatility in the stock is high due to the earnings release this upcoming week. The opportunity to capitalize on this volatility is discussed in more detail below.

Addressing The Lack Of Lines In The United States On Launch Day

The lack of people lined up to buy the phone does not concern me for a number or reasons. The first reason being that large lines have never been synonymous with BlackBerry launches. Even when BlackBerry was the must have phone, prior to the iPhone launch, it is hard to remember a time when lines formed for new BlackBerry products. Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) certainly have gained some press recently with long lines in conjunction with new product launches. This is to be expected in some regards.

In the US specifically, the target audience for an iPhone or a Galaxy is quite different from the audience for a BlackBerry. It is quite clear that the target BlackBerry customer today in the US is more likely to be a C-Suite executive than a college student or Starbucks Barista. Looking at the pictures of a typical line for Apple launches, you will notice that you do not see many suit and tie business types lined up. This is not to say BlackBerry would not love to have a larger target audience. However, advertising alone and a new operating system should not be enough to cause a content iPhone or Galaxy owner to ditch his or her current phone. It will take time for the BlackBerry 10 offering to gain traction with this consumer group. As far as why you do not see business people lining up it could be that they just have this unfortunate thing called work. Unfathomable as it may sound, your company executives may not have the time or simply may not care about being the first person in line on launch day.

Additional Reasons Why The US Launch Should Not Be Judged In One Day

Prior to the launch of the Z10, BlackBerry had previously attempted to enter the full touch screen market with their Storm model phone. For all intents and purposes this phone is a sub-par offering when compared against just about any touch screen phone in the market currently. This point likely would not get much of an argument even from those who own one of these phones. Because of this, the majority of BlackBerry users in the US are still using the Qwerty keyboard phones. It would be less than logical to expect these BlackBerry keyboard loyalists to go cold turkey and buy a touch screen phone day one. This point is driven home further when considering that the keyboard version of the new BlackBerry phone will be released in a few months.

It is also quite clear that a large, if not a resounding majority, of the BlackBerry user base is in some shape tied to corporate or government accounts in the US. Here again, you do not see a business decide they need to upgrade every phone deployed the day a new product is released. This is no different from how a business looks at the laptops and computers they deploy. These company assets have a useful life, and when productivity is degraded or the useful life is up then the asset is replaced. If companies did decide to upgrade their entire user base with the Z10 launch, they would not send their IT staff to an AT&T store to buy the phones. If they did, those companies would make excellent short opportunities for their disregard for the concept of efficiency

Lastly, the initial goal of the BlackBerry launch should be to stem the tide of user defections first and foremost. There is no question that Apple and Android phones have decimated the BlackBerry user based in the US. However, there still is a user base, and these users need to be targeted first. It will take time for BlackBerry to regain some of the hype and swagger that it has lost over the past few years. Once the base is stabilized BlackBerry can then focus on winning back old users and converting new customers as well.

The Future Is Still Bright

Hopefully you do not believe the lack of people lined up to buy the phone on launch day in the US indicates BlackBerry is going bankrupt. If you do, stop reading now, or better yet put your money where your mouth is and short the stock. As explained in another article I recently wrote Blackberry is worth over $6 per share today assuming the company is liquidated. That gives zero value to the assets, patents, installed user base, and other intellectual property the company has.

This makes it all the more difficult to understand how an analyst like Colin Gillis can go on CNBC and say the company is worth $7 per share. A $7 target price is insinuating that the company is worth its liquidation value plus a few pennies for its intellectual property. His target price must assume the company will simply burn cash in a futile effort to remake the company if BlackBerry 10 does not meet expectations. Mr. Gillis also does not think the company can sell 20M Z10 phones annually.

This is the arbitrary number he says is needed for the company to succeed. This sentiment, as well, is extremely hard to understand for two reasons. The first reason is the company has more than one BlackBerry 10 product coming to market. The statement by Mr. Gillis only references the Z10 touch screen model and seems to ignore the Q10 qwerty keyboard model. There is a strong argument that they keyboard model will outsell the touch screen model, at least in the first generation of the new operating system. Analyzing the level of BlackBerry 10 product sales needed for the company to succeed must factor in both new models being introduced. The assumption by Mr. Gillis that the company will struggle to sell 20M Z10 phones should also be looked at in the context of the global smartphone market. In 2013, the number of smartphone sales worldwide will exceed 1B units. This implies that BlackBerry 10 can not capture a 2% market share of worldwide sales. No statistics, charts, or analysis prove that this is even remotely likely.

Earnings Related Trade

BlackBerry is scheduled to release earnings this Thursday, March 28th, before the market opens. Nothing said in this earnings release will change the short term outlook for the company. Volatility will continue to remain elevated in the stock regardless of if they report good initial sales of the new phone or if the sales are underwhelming. The reason is that there is an extremely broad opinion of what number of units sold should be defined as good. Couple this with uncertainty of the sustainability of future sales, even if initial sales are considered good, and you have a recipe for continued volatility.

For this reason, I went long the stock on Friday through the sale of put options. Specifically, I sold the Mar 28th $15 strike price put options for $1.10 this Friday. This means that I am potentially long the stock at a basis of $13.90 were BlackBerry to close below this price after earnings are released. Conversely, if BlackBerry can stay above $15 when the options expire on Thursday (4 days), I will make a gain of over 7% excluding commissions and taxes. A 7% gain in one week would equate to over a 350% annualized gain.

I chose to invest in BlackBerry this way because of the expected volatility in the share price movement that will not end with the release of earnings. I certainly think the stock could fall after earnings which is further evidenced by the high premium associated the options I sold. If it does fall and I end up owning the stock, I will continue to use volatility as my friend. In this case, I will begin to sell deep out of the money (OTM) call options against my stock. This will allow me to continue to profit regardless of the short term gyrations in the stock. No drop in the stock price and I will see a 7% return in one week. I will then look for another opportunity to let volatility work for me.

Disclosure: I am long BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long through the sale of Put Options as discussed in the article