After carefully studying BlackBerry's (BBRY) financial results released this morning and listening to the conference call, my conclusion is that the chances of BlackBerry being bought just dropped dramatically. A major support under BlackBerry shares has been the prospect of a buyout. Unless there is some new information, BlackBerry shares are likely to fall.
Here are the highlights of the earnings report:
• Revenue $3.1 billion, up 15% sequentially from the previous quarter
• North America revenue grows sequentially 30%, APAC revenue grows 35%, EMEA revenue grows 9%
• Shipments of 6.8 million smartphones, up 13% sequentially from the previous quarter
• GAAP loss from continuing operations of $84 million, or $0.16 per share
• Adjusted loss from continuing operations of $67 million, or $0.13 per share
• Cash flow from operations of $630 million
• Cash and investments balance of $3.1 billion
"During the first quarter, we continued to focus our efforts on the global roll out of the BlackBerry 10 platform," said Thorsten Heins, President and CEO of BlackBerry. "We are still in the early stages of this launch, but already, the BlackBerry 10 platform and BlackBerry Enterprise Service 10 are proving themselves to customers to be very secure, flexible and dynamic mobile computing solutions. Over the next three quarters, we will be increasing our investments to support the roll out of new products and services, and to demonstrate that BlackBerry has established itself as a leading and vibrant player in next generation mobile computing solutions for both consumer and enterprise customers."
Traditionally, BlackBerry generated billions of dollars of revenues from network services. It was known that the transition to BB10 would reduce service revenues that were associated with legacy devices. However, the drop in service revenues is greater than my expectations. The key point about the service revenues was they were considered a predictable source, and a financial buyer could have been interested in BlackBerry partly because of the predictability of the service revenues. Based on this earnings report, in my analysis, service revenues are likely to deteriorate much faster than previous expectations.
Data for a full analysis is not available as of this writing, but preliminary inference is that the sale of the new Z10 device is not catching traction.
A buyout of BlackBerry has also become less likely because of the prevailing market conditions in the smartphone market. The smartphone market in developed countries is near saturation. There is growth in developing markets but not in high-end smartphones. This phenomena is also hurting Apple (AAPL). Apple stock continues to trade below $400 as analysts are ratcheting down revenue expectations for this quarter. Sales of Samsung Galaxy S4 are also running below expectations.
From a buyout point of view, shares of Nokia (NOK) are more attractive. Nokia is gaining market share in the low end smartphone market in the emerging world. Based on these BlackBerry results, any potential acquirer is likely to be more interested in Nokia than before.
Based on these results, it would not be surprising if BlackBerry shares in due course swooned to about $7.00 to $8.00. In my analysis, the probability of a buyout has dramatically fallen and as such the takeover premium in the stock will diminish resulting in the stock price falling.
One note of caution is that this stock is subject to short squeezes. As of May 31, 171.3 million shares out of total float of 485.14 million were short; short ratio was 6.90. These reported statistics can lead to a short squeeze. However, the proprietary data at my firm shows that it is likely that the short interest has spiked going into the earnings to levels much higher than the reported levels. As of this morning, it is difficult to borrow this stock to short sell.
Astute investors are well advised to time their entries into the stocks of BlackBerry, Apple, and Nokia based on a proven method such as ZYX Change Method that takes into account not only fundamentals but also the sentiment, technicals, and quantitative criteria. It has been shown again and again that it is difficult to make money on smartphone stocks based on fundamentals alone.