I have repeatedly written on how BlackBerry (BBRY) needs to find a strong financial partner to market its world class technology and products. The company has managed to rise like a phoenix over the last year through the introduction of a new operating system and smartphones. Though the technology is good, the company's pricing strategy and marketing have left a lot to be desired. I don't think that the company spent enough money in marketing the Z10 and Q10 in order to conserve cash.
The recent results have been quite bad in terms of BB10 smartphone shipments. The company's new management has recognized this problem and will increase its marketing spend, which will lead to losses over the coming year. Supporting a global distribution and marketing network is a very expensive proposition, especially as you have to go against giants such as Samsung (SSNLF.PK) and Apple (AAPL). Nokia manages to barely get through, as the costs are subsidized by its huge feature phone segment. BBRY does not have this luxury, and to remain a global player it needs to find a partner fast. CEO Thorsten Heins hinted that he is now more open to this possibility. However, the company needs to move faster as its assets are deteriorating with each day. Its standing and reputation are also falling due to the bad results. I remain positive on the BBRY stock as I think that the stock price undervalues BBRY assets.
The Smartphone industry is becoming fragmented and hyper competitive
The smartphone industry is becoming increasingly fragmented and more competitive each day. All the major smartphone stocks such as Apple, Samsung, Nokia (NOK) are trading at single digit P/E multiples. The stock prices have fell YTD for most of the smartphone stocks and have underperformed both the technology sector and the overall market. The reason is not hard to understand as competition from the low cost Asian companies has been increasing. Not only have the Asian technology heavyweights such as Lenovo, Huawei, ZTE, Panasonic, LG etc. increased their smartphone investments, but pure play smartphone upstarts such as Coolpad, Micromax, Karbonn, Xiaomi etc. have also become formidable rivals. The growth in the high end smartphone segment has been saturated and is now coming from the lower end smartphone segments. These small companies are very strong in the low end segment and are now penetrating the middle segment as well. Apple does not have a product for the low end segment, while BBRY has 2-3 year old models. Only Samsung and Nokia are fighting effectively in the low and mid range segments.
BBRY's assets are deteriorating
BlackBerry has some excellent smartphone assets which help the company differentiate itself from the competition. It offers excellent security, enterprise integration, a popular chat messenger and a world class operating system. However without a strong financial partner, it cannot hope to effectively cover more than a hundred countries. The company's assets are deteriorating, and unless it leverages them, the asset value will keep going down.
- BBRY subscribers are showing an alarming decrease - BBRY's strong subscriber base of 80 million has decreased by almost 10% in the past year. This will put strong pressure on its highly profitable service line which has been the company's savior during the tough times. BBRY is being forced to lower its service fees as rivals start offering a lot of these services for free or at a low price.
- BBM is being overtaken - BBRY's BBM service used to be one of the most popular mobile chat services, being a major driver of its handset sales. However, Wechat, Line, Whatsapp etc. have overtaken BBM in popularity and subscribers. BBRY's decision to port BBM to Google's Android and Apple's iOS is probably too late.
- BES is taking knocks - Blackberry offers the most secure services in the world of increasing espionage and snooping. But the company's security advantage has taken some hard knocks, with US being able to spy on BBRY messages and BBRY being forced to share data with different governments. BBRY still is the best in security, but it needs to advertise and market this fact, otherwise Apple will eat its lunch.
Launching new BB 7 Smartphones does not make sense
BBRY has done a great job in its turnaround, and a missed quarter does not turn it into a villain. The company is fighting strong headwinds and cannot afford to miss a single trick. I was perplexed by their announcement of a new BB 7 smartphone. I am not sure whether the tech savvy customers would want to buy old technology. BBRY has limited resources and needs to speed up its BB 10 offerings. I am not sure if it can afford to divert its energy into an older OS with its attendant expenses. Nokia abandoned Symbian to go with Windows 8 leading to a large savings in OS development.
Who are the Suitors
Blackberry should be attractive to a lot of companies, given its tremendous assets and beaten up valuation. Lenovo has expressed interest in the past and I think a number of enterprise technology players would love to buy BBRY. The Canadian government is an implicit barrier, but I don't think the Canadian lawmakers are stupid. I think they would allow BBRY to go out of Canadian hands, given appropriate safeguards on jobs and facilities. Microsoft (MSFT), IBM (IBM), Cisco (CSCO), Huawei, ZTE etc. are all potential suitors. These companies have huge revenue bases and buying BBRY at the current price won't stretch their balance sheets. BBRY will be able to effectively leverage the distribution and marketing networks to sell its products.
BBRY recent stock decline has a silver lining
BBRY's stock has declined sharply after the recent results and has stayed at the same $9 level, which is half of the $18 peak level reached in 2013. The stock remains undervalued with a P/B of only 0.5x and offers great value to a buyer in my view. BBRY management has also become more receptive to partnerships compared to earlier times when they wanted to go alone.
Blackberry is a great company with good assets, but the company's management needs to be super agile. The smartphone industry has become the toughest technology segment to compete, despite its huge size and growth. The company has adroitly navigated the last year under a new management. But the company cannot miss a single trick, as the competition remains extreme. My first BBRY article on SA advocated that BBRY should find a partner or sell itself. The hype around BB10 launches had temporarily clouded the facts. However, BBRY's top management seems to be realizing the same thing after the recent quarterly results deflated a lot of the hype. BBRY products are pretty amazing and offer an alternative in the Android/iOS dominated world. I think a strong marketing partner/buyer could largely increase BBRY's marketshare. I remain positive on BBRY stock currently, as I think that the asset value of the company is not being properly priced in.