Seeking Alpha
Long/short equity, research analyst, tech, IT channel checks
Profile| Send Message|
( followers)  

Blackberry (NASDAQ:BBRY) short sellers have provided a plethora of reasons for why the company's shares should decline. In my last article, BlackBerry Bear Case Is Flawed - Shares Should Double, I addressed many of those concerns.

Since that time, bearish investors have redoubled their resolve, providing new reasons why shares of BBRY are destined to decline. One articulate bear summed it up thusly:

First of all, in order for BB shares to increase significantly in value, there will need to be more buyers than sellers. In order for that to happen, Blackberry will need to show at least 1 or 2 quarters of actual sales growth AND profit, not merely a small profit derived from implementing various cost-cutting measures such as was the case last quarter. So far, we have not seen any increase in sales. Secondly, considering the relatively low number of shares outstanding, with 164+ million shares being short sold, short sellers now essentially control the market. Based on both those facts, it is very unlikely that we will see any significant increase in share value, let alone see it double in value.

To be clear, those points are spot on... and exactly why BBRY shares should approach $30 by year-end.

I agree that Blackberry will need to show at least 1 or 2 quarters of actual sales growth AND profit. The problem for short sellers is that this opinion is about to become a reality. According to our proprietary research, sales of the Z-10 have increased since February, contrary to one unsubstantiated report. Further, the real story is the Q-10, which is already rolling out with great success in the U.K. and Canada.

So, why is the Q-10 the big story? Let's put it this way -- If you were still using the BB, the question would be "Why?".

We asked that very question, directly and indirectly by conducting and consolidating several large surveys. We found the answer to be threefold. In no particular order:

  1. My employer mandates it.

  2. It's a business-focused phone, unlike most of the phones out there.

  3. I love the keyboard.

Looking at 1 & 2, employer mandates exist because Blackberries are business-oriented phones. Also, the company is a market leader in terms of security and device management, two key criteria for corporations and the government (as illustrated by the U.S. Department of Defense's recent approval of BB10).

BBRY's software platform, (BES) will only strengthen that lead. As for the keyboard, this iconic Blackberry feature elicited the most powerful response from BBRY's customer base. Indeed, an enormous proportion of BBRY's 76M customers have been demanding a modern OS (like IOS, Android, Windows 8, or BB10), but want it combined with a tactile keyboard.

The answer to those demands is the Q-10. Not surprisingly, our research (and initial sales results) show that the Q-10 is set to be adopted by much of BB's small base of customers.

That's right. Small.

This is what many short-sellers haven't considered. To be clear, 76M is nothing compared to the 1B+ smartphone users (and billions of feature phone users) worldwide. In other words, Blackberry is a niche vendor. A loser. A has-been. Tertiary.

In this regard, the shorts are right.

However, this is a very poor reason to be short the stock, because another word for BBRY is cash cow. Investors should note that BBRY regained profitability before launching its new line-up, despite the heavy R&D investment required to develop and market the new line-up. That feat demonstrates BBRY's cash-cow earnings power.

This is because the company has a grip on over 75M customers. When you consider that consumers tend to buy a new phone every 2-3 years, you can start to calculate what BBRY's stock should be worth. With customers upgrading every 2-3 years, 33-50% of any given installed base is buying a new phone in any given year. This hasn't been the case for BBRY lately, because customers have been waiting for new products with a modern operating system.

With the launch of the BB10 family of products, a massive amount of pent-up demand is about to be unlocked. In other words, BBRY is about to make up for lost time with its small customer base.

The Z-10 has been powering the May quarter. The Q-10 is now taking control and will drive the August quarter (and beyond). At least 1 or 2 new models will be added by the end of the November quarter. This will set BBRY up for an intense holiday (February) quarter. The operating leverage from current break-even levels will be equally intense. We calculate that each additional million phones sold will generate 15-cents of EPS. Thus, in the February quarter, we believe the company could be on a $3.00 EPS run rate. This, along with its $6 per share cash balance (which will be over $7 by that time), will easily justify a $30 share price.

Beyond that, the company will need to find new ways to keep things rolling. The question for bearish investors is, "do I want to hang around through four strong quarters to find out...or should I cover now and short it next February, when it tops out at $30?"

What's worse, you not only need to be very sure of your resolve. You also need to be sure that the rest of the short base will stick with you. With over a third of the float on loan, the bears have enough juice to drive the shares well above our $30 price target.

Just ask the GameStop (NYSE:GME) bears. GME is very similar to BBRY. It's a fallen angel with an uncertain future. It also retains a loyal customer base that has been desperately awaiting new products for a long time. Like BBRY, those products are finally coming.

Even its chart looks the same:

(click to enlarge)

A least it did until last month...

(click to enlarge)

With the Q-10 selling out in Canada and the U.K., BBRY should follow suit. Thus, as a former Blackberry short seller, I've put that money to better use -- by going long, at least until next February.

Source: Short Blackberry (After It Doubles)