BlackBerry - Takeover And Going Private Are The Only Good Options Left

Aug.11.13 | About: BlackBerry Ltd. (BBRY)

BlackBerry (NASDAQ:BBRY) has confounded me with its recent product and pricing strategy. The company continues to make big mistakes with new product launches. While the Z10 and Q10 pricing mistakes could be excused, the Q5 pricing seems unforgivable. The Q5 was supposed to be a mid range device meant for the emerging markets where customers could not afford the premium Q10 and Z10 phones. But the Q5 pricing and its geographical targeting does not make any sense. The Q5 is being priced at roughly R 25,000 (~$400) in emerging markets where you can buy top end devices such as the Samsung Note 2, Galaxy 3, Nexus 4 etc. at nearly the same price. Also why is BlackBerry launching Q5 in Canada is another big question. From what I know Canada is nowhere near a low income, emerging market. The Q5 is being positioned as a youth device in Canada. But the smartphone does not have any features that would attract the younger demographic segment. The company's new device, the rumored Z30, is supposed to have a larger screen and slightly better hardware specs. It will not have anything radically new or revolutionary like the Z10 or Q10 with a new BB10 operating system. If BBRY failed to make a success out of Q10 and Z10, I don't think that these new BB 10 devices are going to make BBRY increase its marketshare. BBRY is already losing out on shipment volumes to Nokia (NYSE:NOK) and has gone down to the 4th rank in the mobile OS list. The only redeeming value for BBRY currently is that its stock price has fallen dramatically and the valuation seems attractive from an asset perspective. I am positive on BBRY because of its attraction as a takeover target.

BlackBerry's Product Strategy is a Mess

BlackBerry's product strategy seems a mess with the Q5 a total disaster in my view. The company made a good start with the launch of 2 flagship models the Q10 and Z10. It was unfortunate that the company could not get enough buyers for its new flagship. We are living in a period of hyper-competition in the smartphone market today. Trying to get a big premium for your smartphones is not easy when giants such as Samsung, Nokia and LG are bombarding the airwaves with new smartphones at discounted prices. Though BB 10 is a good OS, it does not provide any game changing feature such as a touch screen. Z10 has now been heavily discounted with some places selling it free with a 2 year contract. BBRY has learnt nothing from the Z10 disaster and Q5 is being priced too high. In fact, it might be cheaper to buy a "premium" Z10 smartphone than a "mid end" Q5. The company's new products such as the Z30 will be simply hardware of the existing handsets and offer nothing new. They will not have any novelty value and will not improve BBRY fortunes. The company is also planning to launch new BB 7 smartphones which again makes little sense. Supporting 2 versions of an OS is hard from both a time and cost perspective. Given BBRY's small size and strained resources, it is bad move. I think that BBRY will continue to lose market share and consumer mind space if it continues along its current path.

Employee Morale is not at the Best given the Firings

BlackBerry is seeing a huge amount of employee churn with continuous news of management and worker exits. I don't expect that the employee morale of the company will be too good with these firings. BBRY has already trimmed a huge part of its workforce after it went into the red in 2012. These new pink slips will make the company's work even harder. The company needs to have a stable management and workforce to be able to work at the optimum level, if it wants a chance to win market share in a super competitive market. I don't think that is the case currently with BBRY.

It seems three BlackBerry executives walked the plank off a sinking ship this week. The mobile company, which is struggling to keep its relevancy after disappointing quarterly earnings and a disappointing product release, stated that it is currently in the middle of restructuring. It would not confirm, however, whether these three were let go as part of that restructuring or if they left on their own.

Source - Venture Beat

Management is not implementing the Strategy

Thorsten seems a good CEO with a good strategy but the implementation is lacking. He wanted the company to explore a software and services only strategy. But we have not seen any execution on this move, despite the hardware not performing upto expectations. The company's services segment is also losing steam with a quarterly loss of almost 5% of its subscriber base. Porting BBM to Android and iOS is just not good enough and BBRY has to do far more.

Going Private or Takeover is a good option

I think going private might be a good idea as the company is substantially undervalued from an asset based valuation perspective. I think that the company might do better with greater resources as the company has some good products and services. However, it does not have the marketing firepower needed to compete in a global market with a number of powerful competitors.

Chief Executive Thorsten Heins and the company's board is increasingly coming around to the idea that taking BlackBerry private would give them breathing room to fix its problems out of the public eye, the sources said. No deal is imminent, however, and BlackBerry has not launched any kind of a sale process, the sources said. Even if it tried, BlackBerry could find it hard to come up with a buyer and the funding to go private. With the company still posting losses and bleeding subscribers, private equity firms and other buyers may not want to step up.

Source - Reuters

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 company has a market capitalization of just $5 billion. This value is even cheaper than it looks, when you consider that BBRY has almost 60% of its market value in cash on its balance sheet. I think that the company could command a higher value if it is liquidated today. The stock has a P/B ratio of 0.5x; which is generally considered low given to loss making companies without growth prospects. I think BBRY could easily command a value of 0.7-0.8x if it is sold today, given its tremendous assets in the form of its patent portfolio, BBM, BES, BB 10 operating system etc.

Summary

I have been positive on both Nokia and BBRY over the past year, given that these stocks had such low valuations given their asset value. BBRY had performed very well initially but seems to be losing its way after the BB 10 flagships failed to perform as expected. Nokia on the other hand is building momentum with its Lumia shipments and seems well set on recovery. I have become less optimistic about BBRY managing to survive alone given the Q5 disaster. I had initially written that BBRY would be best served by an acquisition and think that case has become stronger. I would remain a buyer of BBRY stock at the current price based on asset undervaluation. However, if no buyer comes and the company continues to flounder, then I might revisit the long call.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.