Companies are not developing wearable devices or software applications compatible with the BBRY OS.
Weak financials, declining shipment volumes and sales all indicate BBRY's weak position in the smartphone Industry.
The only upside that we see for BBRY's investors can be if management finds a buyer.
One of the major reasons for the success of Microsoft's (NASDAQ:MSFT) Windows operating systems were the stickiness and its ubiquity. There were better operating systems in the 1990s in terms of networking strengths, security and scalability. However the other operating system vendors could never make a dent in Microsoft's dominant PC operating system market share as the networking effects were too strong. It was only with Apple's (NASDAQ:AAPL) path-breaking product launches of smartphones and tablets that Microsoft's stranglehold of the computing OS market was broken. Now Microsoft is fighting hard to stay relevant as Google (NASDAQ:GOOG) and Apple have together captured almost 95% of the mobile OS market.
BlackBerry (NASDAQ:BBRY) launched a completely new operating system BB 10 last year to regain its lost position in the smartphone market. Though the new devices Z10 and Q10 were good and people gave good reviews to the new OS, the networking effects of iOS and Android have become too strong. It will take a really innovative product for consumers to switch to a new OS. The lack of apps is another key handicap that BB 10 faces. Though the company has managed to engineer BB 10 to emulate Android apps, it has not worked. The company's sales and volumes are declining steeply almost every quarter making its resurgence even more difficult. Developing and maintaining an OS is an expensive proposition which even Nokia (NYSE:NOK) found difficult. The company found sustaining Symbian too hard and switched entirely to Windows. I think that BlackBerry will have to rethink its OS strategy just as it has fundamentally restructured its hardware strategy with the Foxconn partnership. I will not look to buy BBRY stock given the company's weak financial position and its weakening competitive position.
BlackBerry OS is suffering from lack of apps and compatibility with other devices
BBRY OS suffers from a lack of apps and the news that the OS supported thousands of apps proved to be false when it was found that most of the apps were not useful and developed by a single person. As BBRY keeps losing market share, more and more app developers will find the cost of developing solutions for the BBRY platform to be higher than the profits. Even Microsoft with all its massive financial muscle and relationships with the developer community has found it hard to populate the Windows phone OS with popular apps.
Wearable computing devices are becoming the "new smartphones" in terms of their growth and potential, even as the smartphone market is saturating in terms of growth. Major technology companies such as Intel (NASDAQ:INTC), Google, Apple, Qualcomm (QCOM), etc. are putting huge resources in getting a foothold in this nascent industry. Some of the early products such as smartwatches have already made a mark in the technology industry despite their limited functionality. BlackBerry does not have a game plan forr this segment and given the company's limited resources, I don't think the company can make a strong entry. Out of the three popular smartwatches in the market today, none support BlackBerry. While Pebble, Sony (NYSE:SNE), Toq and Samsung Gear (OTC:SSNLF) support Android or iOS or both, none support BBRY or Microsoft. This also has a negative effect on BBRY smartphones as consumers will be reluctant to buy a smartphone which cannot support wearables.
BlackBerry shipment volumes are declining which further limits the pitch for BB 10
BlackBerry is fast losing out as an alternative when people think of buying smartphones as the company's marketing and advertisement budgets are becoming very small. Its distribution is also suffering badly as many of the top electronic retailers (in India) have stopped stocking BlackBerry phones. One of the biggest carriers in the US, T-Mobile (TMUS_) has stopped promoting BlackBerry as volumes may not be enough to justify the spend. Most people who have older BB 7 smartphones such as Curve are upgrading to iPhones and Android phones as the longevity of BlackBerry has become suspect. Blackberry is being looked upon as a niche "banker phone" rather than a mainstream product. Even this would not have been a bad outcome for BBRY other than the fact that bankers and their IT departments are now rapidly moving to iPhones. Samsung is also making a strong play for the corporate market by launching new software and service solutions.
The financial position of BlackBerry is becoming weaker
Blackberry's financial position is becoming weaker by the day as the company racks up large losses. The company is being forced to sell its flagship devices at low prices as consumers are reluctant to buy smartphones from a manufacturer that might not exist in a couple of years. I was surprised to see Z10 being sold for less than Rs 18,000 (~$300), given that this first BB 10 smartphone was launched in March last year at around Rs 45,000. Prices of smartphones decline over time but more than a 60% cut in a year indicates a deeper problem. I found the company's smartphones to be overpriced when they were launched, but now I think they are being underpriced. BBRY is losing money as it is selling these phones at a loss. Despite workforce rationalization, BBRY is in a tough spot in terms of finances. The company shored up its balance sheet by issuing $1 billion in convertible debt to Fairfax. However, BBRY is losing money and market share at an accelerated pace and the company might face solvency issues before it can turn around.
After a Foxconn and a new CEO sentiment surge, the stock is declining again
BlackBerry's stock has fallen back to below $8 levels after the euphoria of the new Foxconn strategy has subsided. BBRY is a high beta stock given there is so much uncertainty about its future. The stock has plummeted along with the rest of the high valuation technology stocks such as Facebook (NASDAQ:FB), Twitter (TWTR), etc. The stock is currently trading near its 1 month high at $8.40. The stock is trading at a P/B of 1.1x and a P/S of 0.6x, but given the decline in sales and lack of profitability, it is not cheap. There are many risks that the company faces as it tries to transform into a software and services player.
BlackBerry has some tremendous software and hardware assets and the new CEO has made some brave decisions to turn around the flagging fortunes of the company. Unfortunately the smartphone industry is going through a hyper competition phase, in which the biggest and strongest players are seeing their sales and profitability decline. Samsung updated its quarterly forecast in which its operating income will decline from last year. Apple, despite its dominance in the premium end, is also seeing its margins and ASP fall. The low and medium end of the industry is seeing sharp gains being made by Chinese players such as Xiaomi and Lenovo, which thrive on low volumes and low profit business models. BlackBerry will find it hard to keep its operating system relevant. It has mostly given up on its hardware business. The company should focus more on its messaging and MDM divisions. It should also look to adopt a low capex software-based model for fighting in the niche mobile segments where competition from big players is lower. I would avoid BBRY stock until I get more visibility that the company is moving further along this route and the cash burn starts to reduce.
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.