BlackBerry Is The New Palm

| About: BlackBerry Ltd. (BBRY)

On April 28, 2010, Hewlett-Packard (NYSE:HPQ) announced that it was set to acquire Palm for $1.2 billion. An optimistic Todd Bradley, executive vice president, HP Personal Systems Group, then proclaimed, "Palm's innovative operating system provided an ideal platform to expand HP's mobility strategy and create a unique HP experience spanning multiple mobile connected devices." Earlier this year, on February 25, 2013, however, Hewlett-Packard quietly sold off what CNN Money dismissed as the "last scraps of Palm WebOS" to LG. Terms of the agreement granted rights to LG for WebOS source code, technical talent, and intellectual property. Instead of using the old WebOS system to operate phones, however, LG went on to install Web OS within its flat panel televisions.

Hewlett-Packard was to unceremoniously label whatever was left of Palm as iPAQ and fold this near irrelevant unit beneath its Corporate Investment grouping. Between 2011 and 2012, HP Corporate Investments racked up a staggering $1.8 billion in operating losses upon merely $316 million in revenue. The background leading up to the Palm debacle was eerily similar to recent business performance out of BlackBerry (NASDAQ:BBRY). Most likely, vivid memories of Palm's ultimate demise will spook prospective creditors, private equity firms, and Main Street investors away from buying into BlackBerry. No, this time is not different.

A Fallen Star

A June 12, 2013 article out of Neil McAllister and The Register ripped Hewlett-Packard for its mismanagement of the Palm brand. McAllister interviewed former Palm CEO Jon Rubinstein, who had quickly grown to regret his board's decision to sell out to Hewlett-Packard, and dismissed the move as a "waste." HP shut down production of WebOS handsets and tablets within eighteen months of acquiring Palm. From there, Hewlett-Packard executives entertained ideas of selling off WebOS to another hardware company. After no takers emerged, HP awkwardly mined the open-source community for WebOS programming ideas. The ultimate sale of WebOS to LG for pennies on the dollar confirmed that HP had abandoned ship. This episode may serve as evidence that once popular technologies promptly die out, after losing mass brand appeal. In most cases, new management above a fallen technological star will be powerless to stop its inevitable obsolescence.

An iconic 2008 photograph of then Presidential candidate Barack Obama and his trusted BlackBerry captured the apex of this particular wing of the smart phone movement. BlackBerry built its reputation upon solid, no-frills electrical engineering and security features. As such, BlackBerry emerged as a go-to brand for serious IT department heads, corporate executives, and political bureaucrats. Similar to Palm, however, BlackBerry miscalculated the Apple revolution, which swung the balance of power away from staid professionals and towards bubbly teenage girls. The 2007 launch of the iPhone changed the game.

On June 19, 2008, BlackBerry stock established an all-time high at $147.55 per share. At its peak, Wall Street then valued the BlackBerry business at near $85 billion, in terms of market capitalization. On October 9, 2013, BlackBerry shares closed out the trading session at $8.11, which then calculated out to $4.3 billion worth of market capitalization. A scathing February 21, 2012 draft out of Jesse Hicks and The Verge listed a series of BlackBerry management gaffes that largely destroyed $80 billion in shareholder value over the course of five years. Hicks claimed that isolated and arrogant executives managed BlackBerry as a "provincial fiefdom." Ironically, BlackBerry once haughtily dismissed the 2007 Apple (NASDAQ:AAPL) iPhone launch event as "amateur hour."

The Mobile Market

On August 5, 2013, research firm IDC released its estimates of second calendar quarter tablet shipments. The BlackBerry Playbook tablet event may be described as disastrous. According to IDC information, BlackBerry OS powered a mere 100,000 tablet shipments in Q2 2013 . For the sake of comparison, 28.2 million Android tablets were shipped out during this same time frame. Even the much-maligned Microsoft Windows Surface tablet platform accounted for 2 million units of second calendar quarter shipments. At the time of the August 5 report, Windows had posted 527% year-over-year growth to arrive at a then 4.5% share of the tablet market.

Research firm comScore followed up the IDC news with an October 4, 2013 report of its own that summarized August 2013 U.S. smartphone subscriber market share. The August 2013 comScore report actually presented averages of data taken between the June 2013 and August 2013 quarter. The comScore information confirmed the presence of a dominant Google (NASDAQ:GOOG) Android - Apple iOS duopoly above the mobile market. Taken together, Android and iOS operated a combined 92.3% of U.S. smart phone subscriptions during this latest quarter. On the handset side of the ledger, Apple and Samsung are also a respective one and two atop this list. At the bottom of the heap, BlackBerry clung desperately to a meager and shrinking smart phone market share. Last quarter, BlackBerry actually lost 0.8% in market share - to operate a mere 4% of the smart phone market.

Last September, Microsoft (MSFT) announced its intent to acquire Nokia's handset and services businesses for $7.2 billion, while continuing to license patent and mapping technologies from the Finnish firm. As an important side note, Microsoft running partner Intel (NASDAQ:INTC) has already telegraphed its staunch commitment to building out mobile chip sales, as a strategic counter to the ongoing deterioration of the PC market. In all, Microsoft and Intel generated more than $50 billion in combined 2012 cash flow from operations. Going forward, Microsoft and Intel both maintain the means and the motives to establish Windows as the solid third-wheel option behind Google Android and Apple iOS operating systems. In retrospect, the origins of the Microsoft - Nokia partnership may have marked the beginning of the end for the BlackBerry movement. BlackBerry is the new Palm.

The Bottom Line

Last September, BlackBerry entered into a letter of intent with Fairfax Financial and a private equity consortium. Terms of the agreement indicated that BlackBerry would be bought out at $9 per share, which would value the business at $4.7 billion, in its entirety. The consortium was awarded six weeks to perform due diligence and line up financing, before closing out this deal. Prior to committing to this letter of intent, Fairfax Financial owned 9.9% of outstanding BlackBerry stock, as the largest shareholder within the company. BlackBerry investors should consider selling out now, in case the Fairfax proposal was to fall apart. Going forward, shareholder activists may be unable to convince the market that BlackBerry is worth more than the standing $9 per share offer.

On October 10, 2013, BlackBerry stock closed out the trading session at $8.20 per share. At this trading level, Wall Street has applied a $4.3 billion market capitalization price tag to BlackBerry. BlackBerry posted $12.5 billion in assets above $4 billion in liabilities at the end of its latest Q2 2014 period ended August 31, 2013. The asset side of the ledger did include $2.3 billion in cash and short-term investments, in addition to $6.7 billion worth of inventory, long-term investments, intangible assets, and property, plant, and equipment. BlackBerry will be left with $3 billion in liabilities, after the $834 million in deferred revenue transitions over towards net income. A balance sheet, of course, is only a snap shot of real business performance. As a pricing mechanism, the stock market discounts future growth potential.

BlackBerry racked up $965 million in losses upon a mere $1.6 billion in Q2 2014 revenue. Top line revenue fell roughly in half, when compared against the prior sequential and year-over-year quarters. BlackBerry banked $486 million in cash flow from operations, for the six months ended August 31, 2013, which was a far cry from the $1.1 billion mark established during the year-over-year semi-annual period. BlackBerry slogged through a $368 million decrease in cash positions, after collecting a net $13 million between the proceeds and acquisitions of short-term investments. Going forward, these losses will result in significant asset write-downs, while banks may also balk at extending credit towards BlackBerry. Similar to Palm, BlackBerry is literally trapped within a deflationary death spiral at Waterloo. BlackBerry shareholders should wave the white flag of surrender and sell out, before the situation worsens 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.