Misery loves company - it's human nature. The fact that it makes us feel better about ourselves to know that someone else just might have it "a little worse" than we do, is fundamentally pathetic. It goes against the purpose of humanity's progress. Nevertheless, in the stock market this type of thought is par for the course. Investors justify their holdings based on how badly a rival company's stock might be doing. But it's not always that simple.
The Race for Market Share
On Tuesday, we highlighted the difference between BlackBerry (BBRY) and Nokia (NOK), two beleaguered tech giants that are trying to make a comeback. We argued that BlackBerry, by virtue of its recent earnings report, which showed meaningful sales improvements and sequential advancements, has made significantly more progress than Nokia.
Nokia bulls disagreed, which was not a surprise. However it was nonetheless remarkable the degree to which investors are making excuses despite the glowing evidence. Nokia has become a poorly managed operation. By contrasts, BlackBerry, which has had its own issues with execution, is (at least) demonstrating that it plans on staying in the game. But Nokia bulls were quick to point out how BlackBerry has lost 80% of its value over the past couple of years. Regrettably, some investors cheered that Nokia shares were up yesterday, while BlackBerry was down - in premarket, no less.
That's fine, but in a forward-looking market, it's no longer a debate at this point as to which company has more upside - it's BlackBerry, especially since Apple (AAPL), which is still a "BMW," has demonstrated that it is no longer flawless. That said, BlackBerry is now in a comparable Audi (AUDVF.PK), while Nokia has entered a Kia (KIMTF.PK). And if Nokia's Q1 20% revenue decline serves as indication, it's likely just the 4-cylinder variety.
There's no way Nokia will be able to keep up in the race. Remarkably, the company does not seem to be gaining traction even as it seems that Apple has entered an "innovation lull." Plus, investors have to wonder if Nokia, which just missed earnings by as much as 10%, is unable to advance as Samsung's (SSNLF.PK) Galaxy S4 seems to have underwhelmed the Street, when's it ever going to happen?
By contrast, BlackBerry, which beat its fiscal fourth-quarter results, while also exceeding phone unit sales by as much as 1 million, is clearly on the opposite trajectory. Meanwhile, Nokia thinks its best course of action is to go on a cost-cutting spree. Investors cheered the improved profitability, which is fine. But company's don't "save their way into more market share."
Nevertheless, Nokia's supporters, mostly investors that have latched on to the company's cheap share price, forget why the stock is cheap in the first place. Here's a secret; it's not because the market is dumb. While we do appreciate management's fiscal awareness, Nokia seems more like a company that is preparing to sell itself than one that is looking to compete. Essentially, it's no longer a race.
Time for some takeout
Is it also a question which company is the more attractive takeout candidate? Although both companies are operating at a loss, BlackBerry is on a path to turn a profit first. Not that this bit of detail matters. But from a fundamental perspective, it's pretty significant. Not only does BlackBerry generate $2.3 billion in operating cash flow, which is almost one-fifth of what Nokia brings in, but BlackBerry has no debt and still has some very compelling assets to offer many companies.
At the top of our list of suitors is (ironically) Microsoft (MSFT), which in this race is a Ford F250. Despite Microsoft's close relationship with Nokia, we still believe that this is a deal that makes too much sense for Microsoft to pass up. At this point, Microsoft, which has struggled with its own phone ambitions, needs BlackBerry more today than BlackBerry needs Microsoft. It is remarkable how the fortunes of these two companies have shifted as BlackBerry is now in the "driver's seat."
The first concern here is whether or not the Canadian government will allow this deal to happen - we get that. While this is a valid obstacle, it's not impossible. Microsoft, which seems to be lumbering, would acquire BlackBerry assets like the BB10 software, a growing music service as well as Mobile Fusion, a product that supports the collaboration of enterprise mobile devices, even that of competing models such as iPhones as well as those on Google's (GOOG) Android platform.
Before you disagree, consider that Microsoft had a 9% market share in mobile phones prior to its partnership with Nokia. Today that number has dropped to 2%. This is despite the advancements of Windows Phone. Imagine what BlackBerry and its yet dominant enterprise footprint, can do for Microsoft's growth. It would only cost Microsoft $18 to $20 per share to close this deal. Would investors of either company accept this offer?
Given BlackBerry's $7.63 market cap, an offer of $11 to $12 billion would close the deal, which would amount to 9% of Microsoft's cash. Microsoft could also do a combination offer of cash and stock, which would give existing BlackBerry investors shares of Microsoft. Meanwhile, Nokia, could then have the option of using BB10 for its strong Lumia platform, while although improved, is still struggling under the Windows Phone OS.
The question here is, would Microsoft set aside its pride long enough to be shown up by BB10? But this should be the least of its concerns. Microsoft should make a phone call to the Canadian government today and ask for clearance.
Interestingly, in the process, BlackBerry would likely be the best thing to ever happen to Nokia in the last three years. For Nokia investors, it would no longer be an environment of "misery loving company." It would become a "win-win" situation. Nokia would have been upgraded to a 6-cylinder engine.