4 Considerations As Bears Attack BlackBerry Shares

Apr.15.13 | About: BlackBerry Ltd. (BBRY)

The recent bearish attack on BlackBerry (NASDAQ:BBRY) is making it a challenge for shareholders to ignore. Prior to the 7% decline in its shares last week, volatility for BlackBerry April put contracts rose on average by 18% on April 1st.. Implied volatility for put options with an exercise price between $8 and $12 was as high as 125%. Even though investing in BlackBerry requires a time horizon of several quarters, it is a good time to determine if the decline represents an opportunity to build a bigger position.

There are 4 things to consider after the recent bear attack on shares of BlackBerry.

1) Short Interest

Short volume continues to increase steadily. Bearishness declined briefly on January 31 2013 to 129.5 million shares, but rose after that. By March 28, short volume stood at 155.7 million shares:

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Data Source: Nasdaq

After the BB10 device was announced, volume dropped. The lack of investor conviction, coupled with a decline in the share price, gave bears another opportunity to build a bet against BlackBerry shares.

BBRY Chart
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BBRY data by YCharts

2) Call/Put Option Activities

Call options are profitable if BlackBerry shares rise. Options with an exercise price of $17 and expiring on April 25, 2013 had a high open interest at 22,536. Bearish option prices rose the most for put options with an exercise price of $13. Despite high volatility for bearish options, open interest is still higher for the April call options, at 383,870 compared to 334,650 for puts.

3) Refutation of High Return Rate

A research report issued by Detwiler Fenton, an investment firm with a market capitalization of $370,710 and whose share price is USD $0.135, stated that:

We believe key retail partners have seen a significant increase in Z10 returns to the point where, in several cases, returns are now exceeding sales, a phenomenon we have never seen before.

BlackBerry and Verizon Wireless (NYSE:VZ) both refuted the claim that there were a high number of BlackBerry 10 returns in the United States. Brenda Raney, a Verizon Wireless spokesperson, said that:

"The quality performance of the Z10 has been in line with similar devices we've launched."

To minimize the impact towards future BB10 orders in the United States, BlackBerry's CEO said:

Return-rate statistics show that we are at, or below, our forecasts and right in line with the industry

The Chief Legal Officer of BlackBerry also added:

Everyone is entitled to their opinion about the merits of the many competing products in the smartphone industry, but when false statements of material fact are deliberately purveyed for the purpose of influencing the markets a red line has been crossed.

4) Marketing

Bearish data from research firms suggested that advertising for BlackBerry's BB10 was ineffective. MKM surveyed 1,500 customers for three weeks after BB10 was launched in the U.S. The firm reported that only 32% of the respondents were aware of the new phone. Raymond James also reported negative figures. The firm found that 71% would never buy a BlackBerry device.

The research figures are negative, but is subject to change, due to marketing activities that are only beginning to ramp up. Even though it could illustrate that BlackBerry has much work to do in marketing BB10 in the U.S., the smartphone maker could look at ways to increase its visibility at carrier storefronts. BlackBerry already said that it is raising its marketing budget significantly to increase awareness of the new product.

Another data point to consider is the impact that musician Alicia Keys, Chief Creative Director for BlackBerry, could have on sales. Extrapolating fan data from various social media sites, it is possible to estimate the positive impact the artist will have on sales in the first year. If investors assume Alicia Keys could convert between 0.5% and 2% of her fan base to a BB10 sale, BlackBerry could generate nearly $100 million in sales:

Alicia Keys

# Fans

Reaction to BlackBerry-Related Post

Average Reaction

Effectiveness

BB10 Sales Conversion

BB10 Sales

Facebook

25,811,856

8,458

45,000

18.8%

0.50%

24,257

Twitter

12,801,838

318

667

47.7%

2.00%

122,069

Google+

3,548,832

435

1,309

33.2%

1.00%

11,793

Total:

42,162,526

9,211

46,976

28.8%

Unit Total:

158,119

Revenue @ $600/ unit

94,871,521

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Notes:

  • a "reaction" is counted as the sum of a re-tweet, share, marked as favorite, or a "plus 1" where applicable.
  • Estimated conversion takes into account likelihood of a click-through

Conclusion

It is difficult for investors with a long position on BlackBerry to ignore the bearish trading pattern in the stock price of BlackBerry shares. BlackBerry rose irrationally to $18 prior to the BB10 launch, only to sell off on the news. Speculators are favoring more bearish attacks on the company en masse, as indicated by the short float being at nearly one-third. Fundamentally, nothing has changed for BlackBerry. The company improved its operational efficiency last quarter to ensure that it is capable of responding to the fluctuating demand for BB10. Advertising spend is aggressive: the main challenge for the firm will be to reverse the negative sentiment of the company specifically in the U.S. In the current quarter, the keyboard-based Q10 set to be released. Along with the number of apps growing daily, and a conscious effort by management to quell false rumors, BlackBerry shares remain a buy as prices fall.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BBRY over 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.