The Phablet Will Kill BlackBerry

| About: BlackBerry Ltd. (BBRY)


BlackBerry business results quickly collapsed after peaking in 2008.

The phablet craze exposed BlackBerry for its lack of innovation, yet again.

Investors should avoid BlackBerry stock.

Interestingly, the oft-ridiculed phablet has emerged as the hottest item within the mobile space. The origins of the phablet may actually date back to the October 26, 2012 launch of Microsoft (NASDAQ:MSFT) Windows 8. Microsoft, of course, had experimented with and scrapped various phone and tablet prototypes prior to Windows 8. Windows 8, however, finally made Microsoft's Metro vision available for public consumption for the first time. Metro refers to a concept where traditional personal computer, tablet, and smartphone interfaces are largely fused together beneath one backbone operating system.

Technology aficionados will recognize the term phablet as a combination of smartphone and tablet devices. Ironically, it was Samsung (OTC:SSNLF), and not Microsoft, that ultimately led the charge to popularize phablet machines. Samsung, Microsoft-Nokia (NYSE:NOK), and even Apple (NASDAQ:AAPL) are trending towards larger handsets and screens, at the same time BlackBerry (NASDAQ:BBRY) has failed to grasp the real inner workings of the mobile markets. Consumers have already thoroughly rejected BlackBerry's tepid attempt to pass off its Z30 as a phablet. Be advised that financial engineering out of Waterloo will not translate into real, long-term growth. BlackBerry shares still carry a very well deserved sell rating.

BlackBerry's Place Within The Mobile Market

On June 19, 2008, BlackBerry stock established an all-time high at $147.55 per share. At that time, Wall Street traders had valued the BlackBerry business model at a near $85 billion, in terms of market capitalization. BlackBerry largely built its empire upon the purchasing power of chic executives, IT departments, and political bureaucrats desperate for functional engineering and security. BlackBerry controlled roughly half of the smartphone market - at the apex of its powers. Ironically, haughty BlackBerry co-founder Mike Lazaridis was to once dismiss Apple as "amateur hour." The Apple Revolution dramatically shifted the balance of power away from staid technocrats and towards hipster consumers. BlackBerry, which has largely been reduced to a $9 stock ($4.9 billion market capitalization), will fall even further behind as the phablet movement gains traction.

On March 7, 2014, research firm comScore (NASDAQ:SCOR) released its January 2014 U.S. Smartphone Subscriber Market Share report. Be advised that the title of this latest report is somewhat misleading, as the information actually presented averages of data taken from the November 2013 to January 2014 quarterly period. BlackBerry actually lost 50 basis points in market share through the Holiday Season. BlackBerry now finds itself behind Microsoft Windows at 3.1% to 3.2% share - at the bottom of the U.S. smartphone market. Windows (3.1%) and Android systems (51.7%), which both operate well-received phablets, combined to recently capture 54.8% of this mobile market subset. Samsung, as an original equipment manufacturer, won 26.7% of U.S. smartphone business through this latest quarter.

Apple, as the second wing within the smartphone duopoly, would represent the only name effectively immune to expanding phablet sales. If anything, Apple's chic target market may be hostile towards oversized phones that appear to mimic Samsung and Android. Apple iOS and Samsung core customers, or fan boys, are somewhat mutually exclusive groupings. Apple did capture 41.6% of both the U.S. smartphone handset and operating system between November 2013 and January 2014 - without any phablet of its own. BlackBerry, yet again, finds itself fighting a losing war on multiple fronts at Waterloo.

The BlackBerry Z30 is No Phablet

Earlier this year, Chris Hall and Mike Law co-wrote a comprehensive "Best Phablets 2014" list for technology magazine Pocket Lint. This Hall and Law piece identified the Nokia Lumia 1520, alongside the Samsung Galaxy Mega and Note lines as some of "the best big-screened phones to buy right now." Pocket Lint praised the Nokia Lumia 1520 as the best Windows 8 phone ever built. Again, Windows 8 originated as a concept to integrate traditional smartphone, tablet, and personal computer features together within one operating system software suite. The Nokia Lumia 1520 is notable for both its six-inch screen and its 20 mega-pixel PureView camera. A 32GB Nokia Lumia 1520 handset retails for $249.99, if consumers agree to the terms and conditions of a two-year service contract.

Still, Pocket Lint identified the Samsung Galaxy Note 3 as the most impressive phablet on the market. The 5.7-inch Super AMOLED Galaxy Note 3 screen displays graphics in 1080 X 1920-pixel resolution. Carrier customers who lock themselves into a two-year service contract may purchase the Galaxy Note 3 for $299.99. The technology commentariat, of course, anxiously awaits Apple's response to Samsung and the nascent phablet movement. Mac Rumors has already speculated that Apple will release two separate 4.7-inch screen and 5.5-inch screen handsets, as part of the iPhone 6 launch. The Apple iPhone 6 would then expand upon the 4-inch screen iPhone 5, but remain significantly smaller than the 7.9-inch iPad Mini screen. Mac Rumors considered a 5.7-inch smartphone screen to be the beginnings of "phablet territory." In any event, the iPhone 6 is likely to maintain Apple's 5S/5C pricing model, where the premium 32GB phone retails for $299, in conjunction with a two-year service contract.

On September 27, 2013, BlackBerry quietly launched its Z30 handset at British luxury retailer Selfridges. From there, the Z30 was made available to Verizon customers for $199.99, on November 14, 2013. Within weeks, Tim Moynihan and Wired referred to the Z30 as "half-baked." Moynihan was somewhat smitten by the touchscreen keyboard, durability, and messaging consolidator Hub feature of the Z30. Moynihan, however, went on to rip the Z30 for its dearth of applications and poor camera. Craig Wilson and Tech Central would have simply suggested that BlackBerry and its users were still "living in the past."

The BlackBerry marketing apparatchik may attempt to pass the Z30 off as a phablet, in order to piggyback off of the latest catchphrase in technology. The BlackBerry Z30 does feature a Super AMOLED five-inch screen that presents images in 1280 X 720-pixel resolution. Classifying the BlackBerry Z30 as a phablet, however, may be somewhat misleading. Phablet territory, again, begins at 5.7-inch screens. The BlackBerry Z30 is no revolutionary phablet. The Z30 is merely a large and middling smartphone attached to a nearly deserted operating system and ecosystem.

The Bottom Line

On December 20, 2013, BlackBerry released financial results for the Q3 2014 period ended November 30, 2013. BlackBerry listed corporate restructuring alongside the apparent expansion of its BBM messaging application program through the quarter. BlackBerry also boasted of closing out 1.9 million smartphone unit sales during this latest quarter. For the sake of comparison, Apple reported record sales of 150.2 million iPhone handsets for its 2013 fiscal year. In all, BlackBerry racked up $4.4 billion in quarterly losses upon $1.2 billion in Q3 2014 revenue. BlackBerry's financial performance deteriorated sharply according to various sequential and year-over-year metrics. Last year, BlackBerry actually banked $9 million in quarterly net income off $2.7 billion in Q3 2013 revenue.

BlackBerry stock changed hands at $9.36 per share at the March 25, 2014 closing bell. Again, at these levels, Wall Street traders have effectively applied a $4.9 billion market capitalization price tag onto the BlackBerry business model. BlackBerry did complete its Q3 2014 having left $3.2 billion in cash and investments above $4.4 billion in total liabilities on the books. Still, BlackBerry bulls and prospective investors should train themselves to analyze the somewhat superficial balance sheet numbers with more of a trained eye. Beneath the surface, BlackBerry may actually be on the cusp of a liquidity crisis.

BlackBerry has generated a mere $405 million in cash flow from operations over the past nine months. The latest statement of cash flows did itemize a $1 billion issuance of debt within the corporate paperwork. BlackBerry actually went on to sell $1.25 billion in convertible bonds to Fairfax Financial and its consortium of institutional investors. Investors have been granted rights to convert the bonds to BlackBerry stock at $10 per share. Full conversion of the bonds may dilute current ownership positions by approximately 25% and add 125 million shares outstanding to the balance sheet. BlackBerry, of course, agreed to these terms out of desperation. BlackBerry may have already gone bust without this lifeline.

Going forward, BlackBerry plans to shut down divisions, lay off workers, and sell off property say nothing for real growth. BlackBerry positions should be liquidated and avoided. Rather than a reflection of fundamentals, share price volatility may also be the work of speculators who have targeted BlackBerry stock due to its relatively small float. Wave the white flag and surrender at Waterloo.

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.