Is It Time To Double Down On BlackBerry?

| About: BlackBerry Ltd. (BBRY)

Just before BlackBerry (NASDAQ:BBRY) reported quarterly results, short float was over 30%. Bullish sentiment seemed to be building, too. Shares held at around the $14 level since March 2013, and even rode as high as $16. When the company reported quarterly earnings that missed consensus estimates, shares dropped 27.76% on the day. BlackBerry did not drop by this much in more than a decade. Why did shareholders sell, and does the drop represent a buying opportunity?

Quarterly highlights

BlackBerry increased sale by 15% from last quarter to $3.1 billion, and shipped 6.8 million smartphones. Sales grew by 30% from the last quarter in North America alone, and were even better in Asia, up 35%. Around 2.7 million units were BlackBerry 10 devices. Gross margins (GAAP) were around 40%.

It was the GAAP loss per share of $0.16 that scared investors. Subscribers also dropped substantially by 4 million. There are now 72 million subscribers. Weakness in all geographic regions was to blame, with the exception of the Asia-Pacific region.

The BlackBerry Enterprise Server software was installed, ordered, or downloaded by 18,000 companies, up from 12,000 in May 2013.

Red Flags

The earnings loss and the subscriber drop were alarming. Pent up demand for the BlackBerry 10 was not sufficient to drive stronger sales. Expenses grew substantially. Selling, marketing, and administration costs rose to $673 million, up from $523 million last quarter and from $547 million last year. Advertising and marketing costs were the primary reasons for the increase.

The CEO said that BlackBerry 10 will no longer be available on the Playbook. Instead, resources will be shifted to the BBM team so that the app would be made available to the Android and Apple system.

BlackBerry expects the second quarter to generate another operating loss. Service revenue dropped to $794 million, down 16% from the previous quarter.

Looking Ahead

A lower-end Q5 device was announced at BlackBerry Live, and will be launched at 106 carriers in the current (second) quarter. If the rumors are true, a BlackBerry A10 later this year. The device is thought to be powered by a 1.5GHz quad-core Qualcomm (NASDAQ:QCOM) processor and will have a 4.65-inch display. This would push the Z10 and Q10 devices to the middle range. Given that initial sales of the Z10 and Q10 were moderate, BlackBerry will likely need to reduce the cost of the device to increase sales.

An A10 is a much needed release by BlackBerry. Nokia (NYSE:NOK) could be releasing a Lumia 1020, code named "EOS." The device could finally make the PureView camera available. On June 19, 2013, Nokia posted on its blog that there are "41 million reasons to zoom in to Nokia Conversations on July 11th."

Both companies are vying for 3rd spot in smartphone market share. Shares are up a respectable 41.5% and 80.68% for BlackBerry and Nokia, respectively, this past year. Investors in Nokia will recall that the company reported a disappointing quarter in April, only to rally in the months that followed:

NOK Chart
(Click to enlarge)

NOK data by YCharts

Analysis: Doubling Down

The severe drop in shares of BlackBerry is alarming. The negative press could hurt sales further, and weaken the effectiveness of advertising initiatives. The decision to make the BlackBerry 10 system unavailable on the Playbook is also concerning, especially after the CEO promised otherwise a few months ago. Despite the concerns, investors who have a long position in the company could consider averaging down. "Doubling down" may be excessive, but makes the point that bulls should be buyers, not sellers, of BlackBerry shares. The reasons are as follows:

1. Shares are worth $5.91 in cash per share, using the $3.1 billion cash figure

2. The worldwide BlackBerry 10 launch is barely half complete, and results do not include many Q10 sales

3. Q10, the cornerstone of strength for the company, only launched recently. Its contribution to earnings will not be meaningful until the third quarter (6 months)

4. BlackBerry was never considered a 3-6 month long idea. A major transition to a new platform, which requires carrier testing, support, and launch, takes time

5. Sweetened promotions from BlackBerry to carriers to get better visibility on the shelf were not done yet. Doing this when the Z10 and Q10 are both available in the U.S. would make sense.

Conclusion

Buying when others are fearful and selling when others are greedy is very much applicable for BlackBerry shareholders. The two quarters of operating loss are disappointing but expected. BlackBerry is increasing inventory levels, expenses for intangible assets, and advertising, all in an effort to push out the new phone. The transition not only negates renewed calls that the company will be bankrupt, but sets up the company as a profitable, niche player in the smartphone space.

Disclosure: I am long BBRY. 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.