Seeking Alpha
Long/short equity, research analyst, tech, alternative energy
Profile| Send Message|
( followers)  

BlackBerry (NASDAQ:BBRY) reported a loss during its last quarterly results as its BB 10 smartphone shipments failed to meet expectations. The company is banking on the success of its new flagship smartphones Q10 and Z10 to remain a viable player in the competitive smartphone industry. However, the company priced its products too high and was forced to discount the smartphone pricing. I had forecasted that the company will need to start discounting its flagship BB10 models, given the large price difference between the Z10/Q10 and equivalent premium smartphones sold by the competition. This is exactly what happened as the company discounted the Z10 by 11% to push sales in India. The company initially defended this move by calling it a promotion by its partners such as American Express (AMEX). But now even that pretence has gone with BBRY doubling the Z10 discount to Rs 11000 (~$180) in exchange of old smartphones in India. Even in its core USA market, the company has been forced to heavily mark down the prices of its smartphones by up to 75%. However the company does not seem to have learned from its recent pricing mistake, since it has kept the price of its new mid end smartphone Q5 at more than $400. This seems to be a dumb move to me, considering that you can buy premium smartphones such as the Sony Experia Z, Nexus 4, Nokia 920. Galaxy Note 2 etc. at roughly the same or slightly higher prices.

Q5 Pricing is another big Mistake

The Q5 was recently launched in India at Rs 24,990 (~$415), which makes the pricing comparable to the high-end smartphones such as Sony Experia Z, Nokia 920, Nexus 4 etc., which trade in the Rs 20,000 - Rs 30,000 range. The iPhone 4, which can be considered as a mid range smartphone retails for ~Rs 19,000 (~$320) in India, after the discounts and exchange schemes. As I have said before, BlackBerry's smartphones do not provide a good value proposition at the prices they are being marketed at. Readers are advised to go through this link to check the competitive smartphones in the Rs 20,000-30,000 range. I think that the Q5 is overmatched in terms of features, brand value and popularity in this price range.

As expected, BlackBerry today launched the Q5 in India, which is the most affordable smartphone running its BB10 operating system. Priced at Rs 24,990, the Q5 not only brings the new swipe-based UI, but also a physical QWERTY keypad, which is a rarity these days. BlackBerry hopes that the two factors - the pricing and physical QWERTY keypad - would help it revive its fortunes in India, one of the few markets where BlackBerry was still witnessing growth before launching BB10. The phone will be available from July 20 onwards.

Source - DNA

BlackBerry will have to discount the Q5 heavily

I don't think that the Q5 meets its main objective of being able to provide a cheaper alternative to the Q10 given its current pricing. The Q5 is not a "BB 10 Curve" by any yardstick. The premium segment smartphone is getting saturated quickly as even Apple (NASDAQ:AAPL) and Samsung (OTC:SSNGY) are finding it tough to grow their best smartphone models. The stock prices of both these smartphone leaders has fallen a lot in the last few months. I am totally perplexed at how BlackBerry arrived at this pricing and am almost 100% sure that this phone will be discounted very soon. The Z10 is now available for just $49.99 on contract in the USA and is a much better smartphone compared with the Q5. I am not sure about the subsidies that are being given by the carrier for the Q5. But given that BlackBerry has become a bit player in the smartphone market, it does not have a lot of leverage with the telecom carriers, which was indicated during the recent conference call. Why should a person buy an unlocked ~$410 Q5 when he can buy a Z10 for $49 with a plan (I don't think the subsidy is more than $400-500).

Bad Strategic Positioning

BlackBerry needs to move smartphone volumes in order to remain a viable long-term smartphone player. Even Apple, whose business model is based on selling premium products at high prices and discounts, is being forced to cater to the mid range segment. BlackBerry suffers from a lack of marketing and distribution muscle as compared to Tier 1 players such as Nokia. The Q5 was supposed to fill a crucial hole in BlackBerry's portfolio and help BBRY increase its volumes, while the Z10 and Q10 would provide the profits. However I think the Q5 will fail totally in achieving that.

Stock Valuation and Performance

BlackBerry has become quite cheap after it reported a loss during its last quarterly result and forecasted losses for the next few quarters. The management confidence also seems to have gone down quite a bit as BB 10 shipments have been muted. The company has a market capitalization of just $4.6 billion as the stock price has declined by more than 35% in the last one month. The stock has a P/B ratio of 0.5x and P/S ratio of 0.4x.

Summary

I have been positive about the BBRY stock given that the company's stock price is not adequately reflecting the value of the company's strong software and service assets like BES, MDM, email service etc. It remains good value for a potential buyer such as Samsung, which is not strong on the software side of the business and is trying to develop an alternative to the Android OS. However, BBRY management is making just too many mistakes for my comfort. I had given it a pass on the recent bad results and thought that the management was on the right path by decreasing the Z10 price to reflect the market realities. But the company has blundered again with the Q5 pricing. BlackBerry is trying to turn around and cannot make mistakes. I remain positive on BBRY as it remains a good acquisition target at the current price. However, the company needs to find a buyer urgently as its prized assets are deteriorating in value.

Source: BlackBerry's New Mistake - Q5 Pricing Makes It A Surefire Loser