BlackBerry: The Hits Just Keep Coming

| About: BlackBerry Ltd. (BBRY)

One of the most debated stocks during 2013 has been Canadian device maker BlackBerry (NASDAQ:BBRY). The phone and tablet maker showed the potential for a huge year on the back of its BB10 launch. However, the company has continued to disappoint, and investors now must hope for a buyout of this company. While I thought there was still hope for this name, I am now a bit more worried about this stock in the short term. Today, I'll detail why.

Analysts raising red flags:

A lot of BlackBerry analysts have been very negative on the business lately, and that is the focus of my argument today. Yes, there is potential for a buyout, which these analysts have noted, but will it come in the next couple of weeks? BlackBerry is scheduled to report its quarter on September 27th, just over two weeks from now. Unless you think a buyout or some other deal happens before the end of the month, analysts see a lot of pain coming for shareholders.

The first negative note came from Pac Crest, which cited more than $5.3 billion in off-balance sheet purchase commitments. These commitments include $4.3 billion in purchase order commitments, which the research firm says could limit a potential takeover price. The same link above cites Nomura arguing that a bid of more than $12 or $13 is unlikely. While that still is a nice premium from Tuesday's close of $10.94, this is a stock that was at $8.57 in late July. A large move has already been made, leaving a larger risk to the downside.

Jefferies' Peter Misek, who has been one of the biggest BlackBerry bulls, also hit a panic button in August. Misek stated that BlackBerry 10 build order plans were cut to 1 million in July from more than 2 million, and that August plans were cut by another 10% or so. Misek said that Q5 sales were off to a slow start in Canada, and Q10 prices were cut. He believes that fiscal Q2 (the quarter being reported in a few weeks) total phone shipments will be 5 million, well below the 6.8 million seen in Q1. He also sees just 2 million BB10 phones sold, down from roughly 2.7 million in Q1. Misek believes that BlackBerry's sales are trending well below analyst estimates.

The Wall Street Journal also had an article that detailed the dismal launch of the Q10 phone. The article discussed how BlackBerry delayed the launch of the phone, which has backfired according to carrier executives in the US and Canada. Phone discounting on the Z10 has already begun, and inventories are piling up. Overall, the article believes that the Q10, expected to be the company's savior, has been a total flop. The Journal is also now reporting that BlackBerry has laid off a chunk of its US sales force, which would not be a surprise if sales are very light.

Current estimates much lower:

When I wrote my previous article a few months ago, the average estimate called for $13.14 billion in revenues for the fiscal year, which ends at the end of February 2014. Obviously, the disappointing Q1 result, compared with a number of disappointing analyst reports since then, has completely changed the picture. Current estimates call for just $12.07 billion. The current figure does represent roughly 9% growth from the $11.07 billion figure in the prior fiscal year. However, the revenue number has come down by more than $1 billion since my last update, taking away more than half of the projected growth.

For the upcoming report in a few weeks, the current analyst average is for $3.06 billion in revenues, a rise of 6.6% over the $2.87 billion figure from a year ago. Since the company does not give guidance, analysts are forced to really speculate on the name, so the revenue range among the 33 analysts on Yahoo! is $2.35 billion to $3.61 billion. That's a very wide range, and with a couple of weeks to go, it could still change before the report. Analysts are looking for a loss of 15 cents per share, which will probably be an adjusted figure after one-time items. Like the revenue number above, the earnings range is wide, from a loss of $0.50 per share to a profit of $0.24. Last year's period was an adjusted loss of $0.27 per share.

Conflicting buyout reports / Microsoft's (NASDAQ:MSFT) deal:

There is just so much noise when it comes to a potential buyout that you really don't know what report(s) to actually trust. On Monday, we heard that former BlackBerry director Prem Watsa had lined up billions of dollars to help take the company private. BlackBerry shares rose almost 6.4% on Monday, probably thanks to the above-mentioned report. However, on Tuesday, shares declined by 5.1%, as we heard that Watsa's Fairfax is having trouble lining up buyers. It would not be a surprise if we hear these on again, off again type rumors every couple of days for a while.

There were also some rumors that Microsoft was sniffing around when it comes to BlackBerry. The likelihood of this would depend on what cash resources Microsoft would need to use. By now, everyone knows that Microsoft recently purchased Nokia's (NYSE:NOK) devices and services business, along with some patents. I called this purchase a financial win for Microsoft, only because Microsoft did not have to use its US cash resources for the deal. Microsoft's US cash pile was less than $7.5 billion at the end of its latest quarter, which represented just around 10% of its worldwide cash resources. I argued that the deal would have been a negative for Microsoft had the company needed to use US resources, which would have taken away from the company's dividend and buyback.

That's where things are unclear for a Microsoft-BlackBerry deal. If Microsoft could finance some sort of deal using foreign cash resources, it is one thing. But if Microsoft has to dip into its US cash pool, then Microsoft shareholders will be disappointed in terms of a dividend or buyback going forward. Either the dividend/buyback will be slowed down, or Microsoft will have to issue more debt for them. Debt means more interest expenses, and that means lower profits.

Apple (NASDAQ:AAPL) and its new / cheaper iPhones:

BlackBerry exists in a very competitive space. They are not a company that has a monopoly and lots of power. That space got even more competitive on Tuesday, when Apple not only released its new iPhone, but a cheaper version as well. This isn't exactly breaking news, but adds more competition to the space.

Apple is now looking to take aim at the lower end of the market, and to try to bolster its space in emerging markets as well. As I discussed in my latest Apple article, Apple has gotten new carriers on board, and a cheaper iPhone leads to more opportunities. With Apple being able to sell even more phones now, BlackBerry's competition increases even more. Don't forget, Apple doesn't need to steal away millions of customers that might have gone for a BlackBerry. Even if Apple steals 100,000 customers from BlackBerry, there's a much larger impact on BlackBerry than there is on Apple.

Final thoughts:

In the last month and a half, BlackBerry shares have rallied from $8.57 to nearly $11 on the hopes that a deal or buyout takes place. While the rumors swirl around, analysts have noted that BB10 sales are very weak. For those that don't believe a buyout of this name is coming in the next three weeks, the upcoming earnings report could be very ugly for shareholders.

BlackBerry seems like a great short candidate here, if you believe that results are poor. While a short position seems logical, there is the chance that a buyout could take place. So my advice for short sellers is the following. If you are going to short BlackBerry, you might want to hedge your position, just in case. Right now, the September 27th $11 call options are going for about $0.86. While that hedge seems expensive, BlackBerry shares declined by more than $4.00 after last quarter's report. BlackBerry shares have rallied thanks to some buyout hopes, but if they don't come true, this company's results won't justify the recent rally, and shares will go lower.

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.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.