When a company is performing to its strength and its stock is surging, bulls expect the same is going to continue. They fail to realize that what goes up can come down. The same happened with BlackBerry (NASDAQ:BBRY) investors who could not adapt to the changing market trends.
The once mighty smartphone veteran saw a consistent rise in its revenue, which peaked from $294 million in 2002 to $19.9 billion in 2011, growing at an average of over 52% annually during this period. After a mighty performance for a decade, it was hard to accept but the company's downfall had begun once it stopped innovating and adapting according to the needs of the market.
However, BlackBerry bulls still expected sales to improve, which they thought was just a smartphone away. The company did come up with some phones in an attempt to turn around, but nothing helped and revenue continued to fall.
Similar to a stark fall in revenue, BlackBerry also lost its market share to Android and Apple (NASDAQ:AAPL), which accounted for 92% of global smartphone market share in the second quarter of 2013. Though BlackBerry started to lose market in 2011, the scenario had changed when Apple released its first smartphone way back in 2007. Apple's iPhone was the beginning of the touchscreen interface with app-based software, which was well received by the market.
Although, Apple and BlackBerry both rely on an integrated hardware and software strategy, only Apple has been able to make it an enormously profitable strategy. The reason was that it consistently came up with new phones and new apps that kept it in the driver's seat. BlackBerry realized the importance of new phones at regular intervals and a new OS, but it was quite late by then as competitors had taken the lead.
On the other hand, Google's Android has been able to dominate the market because of cost advantages, as it has completely open-sourced its operating system, Android, to OEMs for free. No doubt, competition has taken a toll on Blackberry, but the real perpetrator has been the company itself with delays in coming up with the next generation of phones.
More Troubles Follow
Troubles seem to be never ending for BlackBerry as recently, T-Mobile US (NASDAQ:TMUS) decided to stop carrying BlackBerry's handsets in its stores and it will only offer them online. According to T-Mobile, BlackBerry's phones were taking up a lot of space on their shelves and inventory with very modest demand, that too only from business customers. Moreover, according to market research company IDC, BlackBerry is also losing its enterprise customers as for the first time, Apple and Samsung have dispatched more phones to enterprises than BlackBerry.
Acquisition And Red Flags
Recently, Prem Watsa and his proposal to acquire BlackBerry at $9 a share was in the news. Although Watsa has a reputation of being an honest-dealing value investor, the deal looks highly unusual and the market also looks apprehensive about the deal.
The company looks fairly valued as it has cash and investments worth $2.6 billion and no debt, with property, plant and equipment, intangibles and long term investments having a book value of $6 billion. The company's balance sheet does look robust, but there are a few red flags that make this investment suspicious.
In the last reported quarter, the company recognized a loss of $965 million, out of which $934 million was against inventory and supply commitments, which might mean that either BlackBerry overstated its incomes previously by recognizing them early or else the company is correcting its previous mistakes, which had a magnified effect in the quarter.
In either case, a possibility that crosses the mind is that BlackBerry did something wrong by denying the return of a huge number of Z10 devices in April to cover up the poor performance of its flagship phone and mislead its shareholders, or might be misleading them now.
Further, when the company cancelled its second-quarter conference call despite dubious and appalling financial results, questions regarding its governance do crop up. As the company is a potential takeover candidate, the details of its current quarter's performance are extremely important. The lack of transparency from management at this point of time does raise doubts. Moreover, keeping in mind the personal relationship between Heins, Watsa, Lazaridis, and the Board, the doubt about whether the transaction will be in the best interests of shareholders remains a question..
As a company, BlackBerry is in deep trouble, both in terms performance and the quality of management. I do not see any turnaround from here on and the only possibility for shareholders to profit from is to buy stock at current prices and sell it when the company goes private at $9 per share and gain more than 12% in a couple of months. However, if Watsa is not able to find $9 per share value in the company and backs out from the deal, then investors' confidence will deter further and the stock might plummet further.
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.