Will BlackBerry Run Out Of Cash?

| About: BlackBerry Ltd. (BBRY)

On December 21, 2013, John S. Chen led his first quarterly earnings call as BlackBerry (NASDAQ:BBRY) CEO. According to Wall Street traders, Mr. Chen was a smash hit. BlackBerry stock actually opened at $6.34, before selling off sharply to $6.08 and a 4.1% loss within the first 30 minutes of this trading session. That morning, of course, Chen was to make a three-minute appearance on CNBC to further outline his turnaround plans for BlackBerry. Chen took the time to project that BlackBerry would be "operational cash flow neutral," by the end of 2015, before resuming profitability during fiscal 2016. Wall Street apparently took Chen at his word, and powered BlackBerry stock through $7.20 per share and a 15.5% gain on the day. The short-term euphoria, however, papered over sharply deteriorating fundamentals within the BlackBerry business model. BlackBerry may actually be at risk of running out of cash.

BlackBerry Short Squeeze

A short seller will first borrow stock from another investor and immediately sell that position for cash. At a later date, the short seller will re-enter the market to buy-to-cover shares and replace the original stock loan. Short sellers therefore profit amid stock market declines. Going short, however, is always a risky proposition because share prices theoretically range between zero and infinity. A short squeeze occurs amid a stock market advance when panicked short sellers buy-to-cover and drive share prices further higher upon relatively massive volume.

On June 19, 2008, BlackBerry shares established an all-time high at $148.13. Five years later, on December 10, 2013, BlackBerry stock collapsed to a multi-year low of $5.44 per share. BlackBerry management largely burned through $80 billion worth of market capitalization, after referring to the Apple (NASDAQ:AAPL) ecosystem as "amateur hour," awarding R&B diva Alicia Keys the global marketing director title, slogging through a disastrous BlackBerry 10 launch, abandoning plans to sell itself, and laying off thousands of employees. To date, BlackBerry short sellers have enjoyed a literal Field Day, to say the least. BlackBerry has remained one of the most aggressively shorted stocks over the past year.

As of November 29, 2013, Yahoo Finance reported that traders had sold 150.8 million shares of BlackBerry stock short. On November 30, 2013, BlackBerry closed out its latest Q3 2014 with a mere 526.2 million shares of common stock on the books. At $7.22 per share, Wall Street traders then applied a $3.8 billion market capitalization price tag to the BlackBerry business. Be advised that BlackBerry share prices are especially prone to rumor mongering and volatility due to the relatively minimal share-trading float. Heavy December 21 buying action in BlackBerry stock may have been a classic case of a short squeeze. Ironically, BlackBerry cash burn did help to generate the smoke for this latest smoke, mirrors, and laser light show.

BlackBerry Cash Management

For several months, analysts such as Troy Crandall of MacDougall, MacDougall & MacTier have supported their bullish case for owning BlackBerry stock based upon the thesis that the company "has no debt and a fair amount of cash." BlackBerry closed out its latest quarter with $2.3 billion in cash, $788 million in short-term investments, and $130 million in long-term investments, above $4.4 billion in liabilities on the books. BlackBerry liabilities did include $699 million in deferred revenue, which will fall off the balance sheet when it is ultimately booked as revenue. BlackBerry would then be left with $3.2 billion in cash and investments to effectively back $3.7 billion in financial and tax liabilities.

Nine months earlier, on March 2, 2013, BlackBerry transitioned into fiscal 2014 carrying $1.5 billion in cash, $1.1 billion in short-term investments, and $220 million in long-term investments on the balance sheet. BlackBerry then operated with $2.8 billion in cash and investments above $3.7 billion in liabilities. BlackBerry therefore increased cash and investment positions by $400 million over the past three quarters. $2.7 billion worth of Q3 2014 BlackBerry inventory write-downs, however, may be the first clue that all is not right at Waterloo.

The Q3 2014 statement of cash flows indicated that BlackBerry actually netted $443 million on the difference between the proceeds and acquisition of financial investments, over the course of the past nine months. BlackBerry also collected upon $1.1 billion in accounts receivable between March 2 and November 30th of this year. Perhaps most importantly, BlackBerry closed out a $1 billion convertible bond deal last November 4th. BlackBerry therefore effectively generated $2.5 billion in cash off bill collection, trading investments, and taking on debt. Without these activities, BlackBerry may have been left with a mere $700 million in cash and investments on the Q3 2014 books.

The Bottom Line

BlackBerry business operations are running on fumes. The near dearth of positive cash flow from operations, in conjunction with this latest Foxconn partnership may signal that BlackBerry executives are waving the white flag at Waterloo. BlackBerry has been all but irrelevant in a smartphone marketplace dominated by the likes of Apple iOS, Google (NASDAQ:GOOG) Android, and Samsung (OTC:SSNLF). As such, BlackBerry has been reduced to listing 60 million iOS and Android BBM messaging downloads as a quarterly highlight. BlackBerry's latest gimmick appears to be an attempt to transform the business into a service enterprise, while effectively floating the note for one more year. To do so, investors may expect BlackBerry to take on another $300 million in restructuring charges, as the company shuts down large swaths of its hardware business.

Terms of the aforementioned November 4 convertible bond agreement granted institutional investors rights to exchange bond principal for BlackBerry stock at $10 per share. On that date, the institutional investors were also permitted a 30-day window for lending out an additional $250 million to BlackBerry. With no takers, this option has since been extended to January 13, 2014. This $1.25 billion in convertible bond principal may add 125 million shares of common stock to a balance sheet that only carries a mere 526.2 million shares of common stock outstanding at the moment. Meanwhile, BlackBerry may pay out $75 million in bond interest upon this position over the next year. The convertible bondholders, of course, would move ahead of the shareholders amid any asset sale in the event of bankruptcy.

Conservative investors should consider selling out of BlackBerry stock and cashing in upon any short-term gains made off the $5.44 lows during the past month. If anything, BlackBerry shares may trade as if they were linked to casino gambling, rather than pricing out any real reflection of the underlying business fundamentals. BlackBerry may burn through $500 million in cash and investments per quarter over the course of the next twelve months.

Disclosure: I am long AAPL. 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.