BlackBerry Shareholders Got Flooded

| About: BlackBerry Ltd. (BBRY)

On November 4, 2013, BlackBerry (NASDAQ:BBRY) issued a press release that it had concluded its review of strategic alternatives. As central to this release, BlackBerry indicated that it would be taking on a $1 billion loan from a consortium led by Fairfax Financial. The telecommunications firm immediately replaced outgoing CEO Thorstein Heins with John S. Chen and appointed Fairfax CEO Prem Watsa as lead director. The BlackBerry strategic review period ended with a loud thud, after rampant speculation of prospective buyout deals from the likes of Fairfax Financial, [[IBM]], Google (NASDAQ:GOOG), and even Facebook (NASDAQ:FB), failed to actually materialize. Traders were obviously not pleased with the news and unceremoniously dumped BlackBerry stock to $6.50, for a 16% loss on the November 4 trading session.

Wall Street may have ultimately waved the white flag at Waterloo. Traders have effectively declared that BlackBerry would be worth more if it were to be immediately broken up and sold off as scrap, than allowed to still operate as a going concern. Traders should also recognize that BlackBerry's institutional investors have hedged their bets and put themselves to the front of the line, in the event of any bankruptcy. The shocking collapse of BlackBerry has remained one of the more interesting stories of the Web 2.0 era.

Shareholder Dilution

Shareholders, of course, own BlackBerry Corporation. The BlackBerry board of directors represents shareholder interests and is in charge of hiring executives to run the day-to-day operations of the business. All executives are tasked with upholding a fiduciary responsibility to manage the corporation for generating long-term shareholder wealth. Be advised that the stock market auction functions as a pricing mechanism that discounts future earnings growth. In effect, share prices are a leading indicator, as opposed to a confirmation of immediate book value. Shareholder rights, however, are subordinate to creditor positions. Shareholder returns and dividends are never guaranteed, while creditors may seize property, in order to make good on default. In the event of BlackBerry bankruptcy, creditors are to be paid out first, before shareholders receive any cash amid liquidation.

Earnings per share (EPS), is one of the most heavily scrutinized statistics on Wall Street. On paper, EPS is a quick assessment of shareholder value, as it simply divides net income by the number of outstanding shares outstanding on the balance sheet. BlackBerry closed out its latest Q2 2014 period with $965 million in losses above 545.5 million shares of common stock outstanding on the books. This performance did calculate out to $1.84 in losses per share for the quarterly period ended August 31, 2013.

Be advised that the Fairfax Financial consortium $1 billion loan has been actually structured as a convertible bond. Terms of the agreement grant the institutional investor consortium the option of loaning out an additional $250 million in debenture principal within the next 30 days. The debentures are convertible into BlackBerry stock at $10 per share. $1.25 billion in convertible bonds may add 125 million shares outstanding to the BlackBerry balance sheet. This massive shareholder dilution, relative to the current 545.5 million shares of common stock outstanding, may best be described as a Noah's Ark flood.

The Mobile Market

On June 18, 2008, the then Research in Motion stock established its apex high at $147.55. This performance calculated out to $82.6 billion in market capitalization. At the time, Research in Motion - BlackBerry systems operated roughly half of the smartphone market. From here, Research in Motion went on to officially change its name to BlackBerry, award R&B diva Alicia Keys the title Global Creative Director, and launch the BlackBerry 10 operating system. BlackBerry initiated these curious moves largely in response to the iPhone revolution. All attempts to maintain and resurrect BlackBerry brand appeal, however, have failed. Yes, decisions out of BlackBerry brass destroyed $80 billion in shareholder value, over the course of the past five years.

BlackBerry is now buried firmly beneath the Google Android - Apple (NASDAQ:AAPL) iOS mobile duopoly. Going forward, Microsoft (NASDAQ:MSFT) is set to complete its acquisition of Nokia (NYSE:NOK) during the first calendar quarter of 2013. From there, a Microsoft - Intel working relationship would all but guarantee the emergence of Windows mobile as a third-wheel alternative to Android and iOS operating systems. Taken together, Microsoft and Intel have averaged $41.8 billion in combined annual cash flow from operations over the past five years. Windows phone popularity arrives largely at the expense of BlackBerry sales.

On November 5, 2013, research firm comScore released its report for September 2013 U.S. smartphone subscriber market share. The September 2013 comScore report actually presented averages of data taken from the quarter spanning between July 2013 and September 2013. BlackBerry actually lost 0.6% in market share during this same time frame. BlackBerry operating systems powered a mere 3.8% of U.S. smart phone subscriptions through the summer months. According to the comScore report, Android and iOS systems operated respective 51.8% and 40.6% shares of the U.S. smartphone market during this latest quarter. Also, recent information out of IDC has all but confirmed BlackBerry as a non-factor within the tablet market. BlackBerry OS accounted for a mere 100,000 Q2 2013 tablet unit shipments. For the sake of comparison, leading system Android was behind 28.2 million in tablet shipments during this same quarter.

The Bottom Line

On November 18, 2013, BlackBerry stock closed out the trading session at $6.17 per share. BlackBerry actually broke down to establish a new 52-week low at $6.14 minutes before this latest closing. BlackBerry was then worth a mere $3.2 billion, in terms of market capitalization. BlackBerry did finish up its latest second quarter of fiscal 2014 with $12.5 billion in assets above $4.1 billion in liabilities on the balance sheet. BlackBerry operated with $8.4 billion worth of shareholder equity, as of August 31, 2013. Over the past two quarters, the BlackBerry asset base has declined by $657 million. Of this amount, the BlackBerry cash reserve position lost $368 million, after the company netted $13 million upon short-term investment trading the prior six months. BlackBerry did collect $610 million in receivables, while also piling up an additional $338 million worth of inventory.

In effect, BlackBerry has been burning through cash, while its smartphones fail to sell and may be collecting dust in warehouse back rooms. Going forward, BlackBerry shareholders may be forced to endure another round of inventory and intangible asset write-downs. A move to shut down the handset and devices division, lay off employees, and restructure this business may result in $500 million in additional charges. At this rate, BlackBerry is likely to burn through the $1 billion loan within the next year. BlackBerry does trade for near fair value, after factoring in ongoing cash burn, asset write-downs, and additional debt into the valuation equation. Again, if BlackBerry were to somehow show signs of returning back to profitability, prospective investors may still abandon BlackBerry, for fear of massive shareholder dilution. Conservative savers should avoid the value trap that is BlackBerry stock.

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.