Deja Vu, BlackBerry

| About: BlackBerry Ltd. (BBRY)

BlackBerry (NASDAQ:BBRY) shares are up about 35% to date in 2014 in what is the case of a heavily shorted stock of an unloved company suddenly going up vertically - the classic January effect squeeze play. The move has been accompanied by some minor news, and a well-publicized bullish call from a widely followed contrarian blogger.

This time last year the stock rallied vertically as the company touted its new BB10 OS and new devices. The company wanted you to believe that the new fruit was so sweet that the loyal fan-base would flock to it and connoisseurs of the past wouldn't be able to resist coming back to their old habit. Analysts issued a lot of bullish calls and raised price targets. But early sales of the devices, while sleek and powerful, were disappointing and the new phones were as easily forgotten as BlackBerry's bizarre Super Bowl ad. The stock hit its high of the year on January 25, 2013 and never looked back, eventually shaving off two-thirds of that price as reality set in. Judgment day finally arrived last year when the once dominant smartphone maker conceded its third place spot in worldwide mobile to Microsoft (NASDAQ:MSFT).

This time around the big news seems to be that the government still likes BlackBerry. It was initially reported on the newswire that the US government ordered 80,000 devices. But this news was later amended to say that the government will rather 'support' 80,000 existing devices. No matter, because even if the government were ordering 80,000 new devices, this miniscule figure is about as many Windows Phones (the 2nd least popular of the big four mobile operating systems, mind you) as Nokia (NOK) has been selling per day. Deja vu - it sure looks like the shorts once again got duped into covering.

BlackBerry has fumbled time and again over the past year. Perhaps it could have saved its hardware business simply by dumping its terribly unpopular OS and moving to the Android or even Windows platform. But management's overconfidence in its own rapidly shrinking ecosystem kept it moving along on the wrong path. It failed to effectively gauge consumer sentiment, overproduced its gadgets and had to take a massive writedown on the excess of units. It kept premium prices on both its devices and BBM service in place too long. And it left the door wide open in emerging markets for Microsoft and Nokia to sneak in and make out like bandits with market share. A new CEO revives some optimism, but he certainly has his work cut out for him.

3 Assumptions about BlackBerry that ought to be called into question:

1)BlackBerry is more secure than iOS, Android or Windows Phone. While it has a reputation for being a highly secure platform, no software has ironclad resistance against intruders. Julian Assange, a man who certainly knows a thing or two about the hacking underworld says iPhone, BlackBerry and Gmail users are all screwed when it comes to privacy.

With drastic cost-cutting measures being implemented, BlackBerry's resources may become overburdened and its security programming efforts may be impacted, resulting in a reduction in the level of sophistication of its security software. Furthermore, if BlackBerry's competitors felt that they were losing potential customers because of a perception that their security is weaker, they would easily fix the problem though software improvements and marketing. But competitors aren't showing any signs that they feel inferior in this regard. In fact, Apple may be gaining an edge in perceived security with its new iPhone fingerprint scanner (a must-have for employees who are prone to leaving their phone at the bar).

2) BlackBerry's patents are a huge asset. A lot of pundits state that BlackBerry has a patent portfolio worth billions. We heard this before from Kodak, which said its patents were worth up to $2.6B. But the true worth is only what someone else is willing to pay for them, which ended up being only $527M in Kodak's case.

3) BlackBerry is an acquisition target. The closest thing to an acquisition was Fairfax's tentative offer to take BlackBerry private. But perhaps they later decided that BlackBerry's state of affairs were too much of a disaster as the deal never closed. Another rumored suitor, Lenovo (OTCPK:LNVGY), can be ruled out now that it has purchased Google's Motorola unit. And certainly, Google's willingness to sell it cheaply hints at a larger problem: the smartphone business has become just another commoditized tech product with rapidly diminishing profit potential. Expect ASPs to decline much the way they have for personal computers. Given BlackBerry's position at the very bottom of the market, there may not be enough future revenue value left for anyone to consider buying it. Not anywhere north of $10/share anyways. Lenovo has agreed to buy Motorola from Google for $2.91B. That might be a good ballpark figure for estimating BlackBerry's wholesale value ($5-6/share range).

The stock has traded up to its 200-day moving average, but downtrends rarely end with v-bottom reversals. It's more common for a w-bottom or a long basing period to take place before a new trend begins in earnest. Especially considering that there hasn't been any unexpected fundamental developments (like a reversal in the earnings trend) to justify a sudden reversal in the stocks trajectory, it seems likely the stock will retest its 2013 lows. Given the strong balance sheet, it may be hard to argue a case for under $6 just yet, but it's equally hard to argue for it to be worth over $10 with it recently incurring disastrous losses. Just keep in mind that balance sheets of underperforming companies can deteriorate quickly. The clock is ticking.

Disclosure: I am short BBRY. 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.