BlackBerry 10 Sales Estimates Are A Joke

Mar.24.13 | About: BlackBerry Ltd. (BBRY)

On January 30, 2013, the company then known as Research in Motion launched its BlackBerry 10 operating system, which was to ultimately form the backbone supporting two separate Z10 and Q10 smart phones. In conjunction with this launch, Research in Motion officially changed its name to BlackBerry (NASDAQ:BBRY) and awarded rhythm and blues singer Alicia Keys the title of global creative director. When taken together, these moves signal the latest changing of the guard at this felled giant.

The financial community largely perceives the BlackBerry 10 launch as a last ditch effort - to save this company from its own historic arrogance at Waterloo. As such, BlackBerry 10 sales estimates and speculation vary between blockbuster figures and that of a total bust. Certainly, BlackBerry shareholders left holding a toxic bag of assets will be targeted as the literal butts of this joke.

BlackBerry Stock Volatility

On January 24, 2013, BlackBerry stock established a recent high at $18.32. The speculative four-month surge between $6.22 and $18.32 was largely due in part to the anticipation of a game changing BlackBerry 10 launch. By the end of February, BlackBerry shares dropped to a quarterly nadir of $12.93, before rebounding sharply to close out the latest March 20, 2013 session at $16. Throughout the past year, BlackBerry stock has been notable for its undefined price-to-earnings ratio, heavy institutional ownership, and staggering short interest. These aforementioned variables combine together as an imperfect storm for extreme stock market volatility, especially when juxtaposed against a backdrop of relatively minimal market capitalization and outstanding float.

The case can easily be made that various competing groups maintain special interests in telegraphing wild sales estimates for the BlackBerry 10. Contradictory scuttlebutt indicates that European retailers are somehow simultaneously slashing and hiking Blackberry 10 prices. Confusion abounds, as BlackBerry cheerleaders assume that sold out inventory in Europe is due to supply chain inefficiencies and strong demand, rather than conservative merchants purposefully stocking shelves with limited quantities of product.

Last February, Canaccord analyst Mike Walkley infamously pegged quarterly BlackBerry 10 sales at an initial 1.75 million units, before promptly slashing that figure to 300,000. On March 4, Mr. Walkley backtracked on his staggeringly bearish call, and sheepishly opined that the company would have shipped out and sold between 300,000 and 800,000 BlackBerry 10 handsets by the end of this current quarter. Alternatively, bullish Goldman Sachs analyst Simona Jankowski predicts that BlackBerry will move 500,000 BlackBerry 10 units this quarter, before selling between two million and three million of these handsets each quarter throughout 2013. All the while, Louis Bedigan and Forbes Magazine haughtily ridicule the BlackBerry 10 platform as an "enormous, record-breaking flop."

The speculation is pure comedy. Ironically, all technology commentators must agree with a recent Verge review that the BlackBerry 10 lacks a "killer app" that can reorder the smart phone market status quo. BlackBerry will continue to bleed cash, when this latest release proves to be far short of revolutionary. The smart phone is now a commodity, which means that the BlackBerry 10 launch event is literally too little, and too late to save this company from its own self.

The Smart Phone Market

On March 6, 2013, research firm comScore released its report for January 2013 U.S. smart phone subscriber market share. This data presents averages for the quarterly period between November 2012 and January 2013. The smart phone market, as with many things technology, is now effectively stratified as a "winner take all" oligarchy. In this case, Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Samsung, and somewhat to a lesser extent, chip maker Qualcomm (NASDAQ:QCOM). Google Android and Apple iOS operating systems power respective 54% and 34% shares of the smart phone market. On the other side of the ledger, Apple and Samsung occupy the first and second places of this list, as original equipment makers. The smart phone oligarchy is actually consolidating power, as evidenced by Apple's 3.5% increase in market share over the prior quarter, within each individual operating system and handset classification.

At the bottom of the heap, Nokia (NYSE:NOK), BlackBerry, and Microsoft (NASDAQ:MSFT) battle for scraps, as means to remain relevant and simply survive market turnover. The Windows 8 and BlackBerry 10 operating systems are now effectively scrambling for the third and remaining seat available in this game of musical chairs. Interestingly, premium Nokia Lumia and BlackBerry 10 handsets are all powered by the Qualcomm Snapdragon microprocessor platform. The Lumia is notable for the clarity of pictures taken with its 8.7-megapixel sensor alongside the functionality of Nokia Maps. Although the Lumia is not a revolutionary product, its presence will subtract consumption dollars away from BlackBerry as a prospective third wheel. Within its latest quarterly report for period ended December 31, 2012, Nokia posted that it sold 6.6 million smart phone handsets.

Alternatively, government bureaucrats and corporate information technology departments covet the BlackBerry 10 operating system for its security features. BlackBerry and Visa (NYSE:V) executives have already negotiated a deal to transform BlackBerry 10 devices into virtual wallets. Certainly, BlackBerry enthusiasts are hopeful that this company can make inroads into the near-field communications market. These minor developments, however, will not alter the paradigm of today's entrenched smart phone oligarchy over the next year. As such, traders must prepare for industry consolidation. In theory, BlackBerry assets, and in turn, shareholder equity, will inevitably depreciate towards zero as this business continues to post losses.

The Bottom Line

Last year, Google closed out its $12.5 billion acquisition of Motorola. This deal was consummated largely as a defensive move - to shield Google's share of Android revenues away from intellectual property litigation. That very summer, indeed, a California Federal District Court judge ordered Samsung to pay Apple $1.07 billion in damages on patent infringement charges. Last January, however, the Federal Trade Commission decreed that Google provide competitors with access to former Motorola patents "on fair, reasonable, and nondiscriminatory terms." According to Therese Poletti and Market Watch, the smart phone bubble has already burst. These developments do not bode well for BlackBerry shareholders banking upon a future buyout or break up of the company.

On December 20, 2012, BlackBerry released a financial report for its third quarterly fiscal period of 2013, which actually ended December 1, 2012. For Q3 2013, BlackBerry eked out a small, $9 million profit. During the six months prior, BlackBerry tallied $853 million in losses. This small profit is not an exact indicator of revived business per se, as Q3 2013 revenue declined to $2.7 billion - from the $2.9 billion top-line mark the prior quarter.

To turn a quarterly profit, BlackBerry slashed cost of sales, reduced selling, marketing, and administration costs, and recovered $226 million in tax credits. Over the past nine months, BlackBerry has also recovered $888 million in receivables, while also working off $570 million worth of inventory. Amortization accounts for $1.5 billion out of the company's $2 billion in net cash provided by operating activities. In summary, BlackBerry is effectively "floating the note" through financial engineering. This business is bleeding cash.

On March 22, 2013, BlackBerry closed out the trading session at $14.91, which calculates out to $7.8 billion in market capitalization. That very same day, BlackBerry brought its premium Z10 phone to the United States market. Wall Street obviously was not impressed, as traders immediately sold off BlackBerry stock to a near 8% loss on the day. The BlackBerry balance sheet does include $12.6 billion in assets above $3.3 billion in liabilities. In nominal terms, BlackBerry is trading for less than book value. Investors are sending a clear message that this company is worth more if sold off as scrap parts at the junkyard, than it is as an ongoing business. The $5.6 billion in combined property, plant and equipment, and intangible assets, however, are illiquid and effectively worth zero in real terms.

BlackBerry stock is now a strong sell.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.