BlackBerry: Here Is My Number... Call Me Maybe?

Includes: BBRY
by: John R. Conway

The title to this recent story may sound amusing about BlackBerry (NASDAQ:BBRY), but after listening to this song by Carly Rae Jepsen multiple times during this summer, the song title and BlackBerry seemed to fit well for this article. By now most investors have heard the recent news surrounding BlackBerry and how their board of directors has formed a special committee that will look into "strategic alternatives" that are essential for the company.

After that lifeline was announced for BlackBerry, the stock jumped over 10%, and at the time this article is being produced (8/13), BlackBerry is still holding on to their speculative gains. Over the last couple of years, BlackBerry has constantly fumbled the ball, and while I like their products, the company has a poor track record when it comes to management's execution of the overall brand. While this strategic alternative may seem to be a dose of fresh air, in my opinion this only puts a temporary stop on the bleeding, and I believe investors considering BlackBerry should just simply wait on the sideline, or else you could be in for a bittersweet awakening.

This isn't the first time that speculation surrounding a major change to BlackBerry has come into the investment spotlight. This speculation served as nothing more than a drug for BlackBerry where the side effects were worse than the high. Back in May 2012, remember "Strategic Business Model Alternatives" while there are some differences between the two, Blackberry's position in their respective marketplace was still headed in one direction; down, and the stock later followed in the same direction. The Playbook flop and delay of BB10 are two of the other most noted flops where investors who speculated on these events were left with a headache. There is nothing wrong with speculating on a stock on hopes for a major change; I just believe it's important to remember the past to help solidify your speculative thesis.

Low Success Factors:

I am going to get straight to point, and while BlackBerry is handing out their phone number, I don't believe anyone will be calling BlackBerry for a while. Sorry to disappoint those who bought their lotto tickets, but the company is in no need to do anything right this second. I understand in the U.S. smartphone market BlackBerry has continuing declining market share, has a cash flow problem and is lacking a true ecosystem when compared to Apple (NASDAQ:AAPL) or Android platforms. But, possible investors need to analyze the risk factors of the most common strategic alternatives that have been in the media spotlight, rather than just get excited at the idea of a merger, acquisition or privatization. The idea of BlackBerry merging or being acquired by a technology company sounds like an easy solution, but what are the success factors of this happening from start to end?

1) How is an existing company going to acquire/merge a company's product/ services to gain market share? Will it be a difficult task for any company to do successfully, since BlackBerry is still continuing a slow slide in market share and will essentially be competing in a duopoly with Apple and Android platforms.

2) Acquisition talks tend to happen in times of uncertainly, and the process tends to be costly. Companies that desire alternatives can tend to overestimate their ability to turn things around.

3) Patent portfolios can tend to be inflated, based upon future estimates and difficult to value. Companies that may want to merge with BlackBerry could be engaged in long negotiations over how patents will be retained or used.

4) Obtaining/maintaining new clients as well as existing new client relationships will be crucial to the success factor.

Participation also faces a series of hurdles, but also has benefits if BlackBerry is successful. For every benefit that going private has, there is also an obstacle. In my opinion, I would expect BlackBerry to develop a plan on going private, and if they can meet their conditions, then privatization will be the best suitor for BlackBerry. I know this is hypothetical, but right now the success factors for BlackBerry in the strategic area of merger, acquisition and going private are low at best. BlackBerry's management team needs to prove themselves, since at BlackBerry's current price ($11.00), it is being driven on nothing more than speculation.

Caution: Falling Stock Price Ahead

While speculation can be good for a stock, if speculation cannot become reality, the stage could be set for a sharp drop. BlackBerry has Q2 2014 earnings coming on September 27, 2013, and BlackBerry already announced that they most likely will incur another operating loss. I would expect that BlackBerry will continue to incur operating losses and report GAAP losses from continuing operations for the next 3 quarters that will affect cash flow. Thanks to the nice run the BlackBerry has had over the last month, the company has given themselves a nice cushion above their tangible book value. Currently BlackBerry has a tangible book value of low $7 range (cash + real estate / debt). I believe that tangible book value is more relevant than just book value, since tangible book value excludes the cost of intangible assets (patents, trademarks, copyrights, goodwill, etc). Intangible assets are great to look at when a company is successful, but when a company has a poor executing business model as BlackBerry does, I believe book value can be easily inflated and tangible book value is a more appropriate indicator.


I believe BlackBerry has a long way to go before you will see a mass exodus of not only consumers, but also enterprise clients. Even though I have had a bearish tone, there are still areas of BlackBerry that can continue to gain traction with time. Enterprise solutions, specifically in security platforms and security software are one area where BlackBerry has strong margins and has plenty of room to grow. BlackBerry is also making strides in private industry with Blackberry Balance that helps businesses improve employee productivity. Overseas growth, particularly in the Middle East and Asia-Pacific, for BlackBerry helps keep some balance to a company that should be left for dead.

In the short term, I would avoid BlackBerry, as the risk vs. reward is not attractive. The speculation surrounding a merger, acquisition or going private is currently not attractive enough for people to step up to the plate for, because it is unlikely that there will be a deal that will be attractive for both BlackBerry and the other party/parties. Currently, unless investors are expecting some surprise earnings report, the speculation will need more fuel, otherwise the volatility will swing in the bearish direction and volume will decrease. In the meantime, I would take a seat on the sidelines, as I believe you will have plenty of more chances to buy on the dips.

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.