On August 23, 1973, four bank employees were held captive for six days during an attempted robbery in Stockholm. Towards the end of this siege, bank employees were actually rejecting help from the outside, while eagerly aiding and abetting criminals who once threatened their very lives. Indeed, two of the female hostages were to be engaged to their former tormentors, several months after being freed from captivity. Today, the term Stockholm Syndrome extends over battered individuals who develop real affinity for their abusers. Psychologists theorize that Stockholm Syndrome is a survival mechanism for coping with trauma.
Cognitive dissonance separating misguided chatter driving desperate BlackBerry (BBRY) shareholders away from the stark realities of the mobile market is a classic case of Stockholm Syndrome. Beyond the collapse of nuts and bolts operational performance, $1 billion in convertible bonds have effectively hijacked whatever may remain of shareholder equity. Fittingly, CrackBerry.com has emerged as the leading edge of this bullish movement. Junkies appear happy to accept all types of abuse from dealers, pimps, and thugs, in order to secure their next $10 fix of crack. BlackBerry bulls should lay off the pipe and sell stock.
BlackBerry Shareholder Value Destroyed
On June 19, 2008, the then Research in Motion stock established a historic high at $148.13 per share. Wall Street had applied an $82.9 billion market capitalization price tag to the apex of the Research in Motion business. At the time, Research in Motion was coming off 104.9% year-over-year net income growth, prior to closing out fiscal 2008 ended March 1, 2008 with $1.3 billion in net income and $3.9 billion in shareholder equity on the books. In retrospect, wildly overzealous Research in Motion shareholders were then willing to buy into this business at an estimated 65 times trailing earnings.
A November 15, 2008 photograph of Presidential candidate Barack Obama captured the essence of the BlackBerry Revolution. Chic technocrats, staid corporate executives, and prominent bureaucrats all favored the BlackBerry brand for its then impressive security features. BlackBerry was to control roughly half of the smartphone market, at the 2008 height of its powers.
The prior year, in 2007, Steve Jobs and Apple (AAPL) brought the game changing iPhone to market. Three years later, in 2010, Apple was to further build out its ecosystem with the launch of the iPad tablet. In response, BlackBerry was to unveil its very own Playbook tablet. Upon launch, haughty BlackBerry founder Mike Lazaridis then declared, "amateur hour is over." In his scathing 2012 "Research, No Motion" Verge piece, Jesse Hicks blasted BlackBerry executives for their prioritization of somewhat arcane technical specifications above the total consumer experience. Hicks went on to dismiss BlackBerry as an electrical engineering company, while lauding Apple as a "consumer electronics company headed by a non-engineer." BlackBerry simply was not "hip."
All recent comScore (SCOR) and International Data Corporation (IDC) have highlighted Apple, Google (GOOG) Android, and Samsung (OTC:SSNLF) as the primary wings of this ongoing mobile revolution. Going forward, the strengthening of alliances between Microsoft (MSFT), Intel (INTC), and Nokia (NOK) are set to establish Windows as the legitimate third wheel mobile alternative to iOS - Android at the expense of BlackBerry. On August 5, 2013, IDC estimated that BlackBerry had sold a mere 100,000 Playbook tablets during calendar Q2 2013. For the sake of comparison, the alleged Apple "amateurs" sold 14.6 million iPad tablets through the same time frame. A recent report out of comScore also estimated that BlackBerry systems operated a mere 3.6% share of the calendar Q3 2013 U.S. smartphone subscriber market. According to comScore, BlackBerry actually lost 16.3% off its own market share position upon a sequential, quarter-to-quarter basis.
On December 20, 2013, BlackBerry stock actually powered above $7.20 upon news of its new partnership with electronics contract manufacturer Foxconn. BlackBerry managers reported that this deal would help deliver smartphones to Indonesia and other emerging markets. BlackBerry shares gapped up by more than 15% after Constellation analyst Ray Wang speculated that a slew of BlackBerry deals to build out developing world mobile infrastructure would prep the company for a future sale. The scuttlebutt helped drive BlackBerry market capitalization to $3.8 billion. Long-term Stockholm Syndrome BlackBerry owners, however, may still remain in a state of shock after helplessly watching managers burn through $80 billion in shareholder value in five short years.
BlackBerry Shareholder Dilution
On November 4, 2013, BlackBerry issued a statement that it had concluded its strategic alternative review period without a sale, or breakup of the company. Instead, BlackBerry announced that it would be replacing outgoing CEO Thorsten Heins with John S. Chen, while also appointing Prem Watsa, Fairfax Financial Chairman, as lead director. At the time, Fairfax Financial was the most powerful BlackBerry shareholder, with a 10% ownership stake within the telecommunications company. The headline of the release, of course, read that BlackBerry was set to receive a $1 billion investment from a Fairfax Financial led consortium of institutional investors. On November 5, traders dumped BlackBerry stock to $6.50 and a 16.3% loss immediately upon the dissemination of this news.
BlackBerry's headline $1 billion investment actually referred to a $1 billion private placement of convertible debentures. Bondholders would collect 6% interest payments upon their investment principal, while also maintaining rights to convert bonds into BlackBerry stock at $10 per share. The original terms of this agreement granted investors the option to purchase $250 million more in the convertible debentures over the next 30 days. On December 12, 2013, this option was extended to January 13, 2014.
BlackBerry closed out its latest Q3 2014 with 525.2 million shares of common stock outstanding on the books, as of November 30, 2013. Going forward, $1 billion to $1.25 billion in debenture principal convertible into BlackBerry stock may add an additional 100 million to 125 million shares of common stock outstanding to the balance sheet. The convertible deal would then dilute, or flood, individual shareholder equity by at least 19%. The convertible bonds also provide built-in downside protection to the institutional investors. As creditors, these investors would maintain asset rights above equity owners, in the event of any bankruptcy fire sale. BlackBerry shareholders, yet again, have stood pat while brazen decisions out of the executive suite have literally hijacked equity capital.
The Bottom Line
A trader who opens up a short position in a stock will borrow shares and immediately sell those shares for cash. At a later date, the short seller will buy-to-cover, or re-enter the market to purchase stock and repay the original stock loan. Be advised that BlackBerry has been one of the more aggressively shorted stocks throughout the past year. Yahoo Finance reported that traders had sold 150.8 million shares of BlackBerry short, as of November 29, 2013. Again, BlackBerry closed out its latest Q3 2014 with a mere 525.2 million shares outstanding on the books. Going forward, BlackBerry stock trading will be a volatile enterprise, as the relatively small share float makes for prices that are quite susceptible to speculation and rumormongering.
December 20, 2013 trading activity may be more so evidence of a short squeeze, than any long-term breakout based upon fundamentals. On this day, BlackBerry shares tacked on 97 cents, or 15% in value, to close out the trading session at $7.22. Again, this sharp move largely came in the aftermath of talk related to a partnership with Foxconn. The speculation drew attention away from a miserable third quarter during which BlackBerry racked up $4.4 billion in losses. BlackBerry business performance deteriorated sharply throughout the past year to settle in at a mere $1.2 billion in Q3 2014 revenue, while the company also took a $2.7 billion charge for the impairment of long-lived assets. This latest quarterly report confirmed that the BlackBerry 10 movement has been a disastrous flop, as unsold Z10 phones have piled up as inventory to be written off. The company was left to cite 40 million additional iOS and Android BBM messaging users as a quarterly highlight. A BBM messaging application, however, is not to be confused with a major profit driver.
Bulls, of course, may highlight BlackBerry's cash position as a cause for celebration. BlackBerry closed out its Q3 2014 with $2.3 billion in cash and $788 million in short-term investments above $4.4 billion in liabilities. The balance sheet did include $699 million in deferred revenue, which will ultimately fall off the liabilities side of the ledger and shift over to the income statement. BlackBerry therefore transitioned into Q4 2014 with $3 billion in cash and investments to back $3.7 billion in financial liabilities.
Q3 2014 nominal cash figures, however, significantly masked the steady break down of the underlying BlackBerry business model. On March 2, 2013, BlackBerry posted $1.5 billion in cash, $1.1 billion in short-term investments, and $2.4 billion in accounts receivables on the balance sheet. Over the course of the next nine months, BlackBerry was to collect upon $1.1 billion worth of accounts receivables, while also taking on $1 billion in cash from the convertible bond deal. Still, cash and short-term investments on the balance sheet only increased by a mere $408 million between March 2 and November 13. BlackBerry is actually burning through cash at an alarming rate. Short-term traders who bought in near the December 10, 2013 $5.44 BlackBerry 52-week low should consider immediately selling out and taking profits. BlackBerry Stockholm Syndrome hostages, of course, have already fallen in love with the BlackBerry drama and may reject any help from the outside.