Sell BlackBerry. Buy Apple.

May. 4.14 | About: BlackBerry Ltd. (BBRY)

Summary

Apple revolutionized mobile computing at the expense of BlackBerry.

BlackBerry is now a value trap for investors.

Apple shares are poised to generate alpha returns over the long term.

In recent times, simmering feuds between technology financiers, employees, and fanboys have reached a fever pitch as the consumer electronics industry has become increasingly bifurcated. Apple (NASDAQ:AAPL) investors, of course, have been handsomely rewarded for maintaining their commitments to ride the winning horse. Alternatively, BlackBerry (NASDAQ:BBRY) investors who stubbornly clung on to their positions have been all but shellacked over the course of the past six years. Apple's emergence at the forefront of the mobile revolution did come largely at the expense of BlackBerry. Ironically, Apple was at one time the wily upstart who took aim at the formidable BlackBerry Empire with little more than a literal iPhone slingshot. Going forward, contrarians claiming that the BlackBerry Turnaround Party is just getting started need not out-think themselves. This time, it is different. Sell BlackBerry. Buy Apple.

Amateur Hour is Over

On June 19, 2008, Research in Motion's stock established an all-time high at $147.55 per share. Wall Street traders then valued Research in Motion at $82.6 billion, in terms of market capitalization. At that time, BlackBerry handsets controlled roughly half of the smartphone market. An iconic 2008 photograph featuring Presidential candidate Barack Obama and his trusted BlackBerry captured the apex of this particular movement. IT department heads, connected politicians, and chic professionals then favored the BlackBerry brand for its solid engineering and ironclad security features. For the sake of comparison, Apple shares closed out the June 19, 2008 trading session at $171.88, which also calculated out to $151.5 billion in market capitalization. Apple is now the world's most valuable publicly-traded corporation, at $510.4 billion in market capitalization.

Apple released its game-changing iPhone the prior year, on June 29, 2007. Ironically, high-level executives at both Microsoft (NASDAQ:MSFT) and BlackBerry promptly ridiculed initial versions of the iPhone. In a 2007 interview, former Microsoft boss Steve Ballmer infamously snickered at the idea of a $500 phone that lacked a physical QWERTY keyboard. Apparently, the iPhone would fail due to a lack of demand out of business clientele known for rapidly firing off emails throughout the day. Ballmer concluded his rant by stating the obvious. At the time, Microsoft had sold "millions and millions and millions" of phones, while Apple had sold zero. In fact, Apple was to ultimately sell 1.4 million iPhone units through the final quarter of its fiscal 2007. Apple was to follow up this performance with a respective 1.6 million and 20.7 million in iPhone unit sales for 2008 and 2009. For 2014, Apple reported record shipments of 150.3 million iPhone units - to generate $91.3 billion in operating segment revenue.

On April 3, 2010, Apple brought its iPad tablet to market, as a literal one-two deathblow to the BlackBerry competition. Jessie Hicks juxtaposes the dramatic rise of the Apple ecosystem against the spectacular collapse of BlackBerry at Waterloo, in his February 2012 hit piece for The Verge. Hicks then thoroughly dismissed BlackBerry executives, led by founder Mike Lazaridis, as a befuddled group of wonky electrical engineers who had lost touch with the realities of consumer demand. A haughty Lazaridis actually declared "amateur hour" to be over, upon the 2010 release the BlackBerry Playbook tablet. Apple did ship 16.4 million iPad units during its latest Q2 2014 ended March 29, 2014. For now, the Playbook tablet has been all but shelved. BlackBerry may have shipped a mere 100,000 Playbook tablets in its best quarter.

Recent research reports out of both comScore (NASDAQ:SCOR) and IDC have confirmed that Apple, Samsung (OTC:SSNLF), and Google's (GOOG, [[GOOGL]]) Android reign above the winner-take-all mobile market. According to comScore, Android (52.2% market share) and iOS (41.4% market share) systems operated a combined 93.6% share of the U.S. smartphone subscriber market through the first calendar quarter of 2014. BlackBerry actually lost seventy basis points in share through Q1 2014 to close out this time frame, clinging on to a mere 2.7% of the U.S. smartphone subscriber market.

The Phablet is On Deck

Ironically, Microsoft Windows 8, which Mark Hachman and PC World already ripped as "fail plus fail equals more fail," may have signaled the first real attempt to merge traditional personal computer, tablet, and smartphone interfaces beneath one operating system. The phablet, of course, is a machine that bridges the gap between standard smartphones and tablets. Heading into 2014, online magazine Pocket Lint identified the Nokia (NYSE:NOK) Lumia 1520 and Samsung Galaxy Note 3 as the best phablets on the market. The Samsung Galaxy Note 3 screen measures out at 5.7 inches. In keeping with this phablet trend, the technology commentariat has speculated that the Apple iPhone 6 will feature a relatively large screen. According to MacRumors, the iPhone 6 will actually include two separate 4.7-inch and 5.5-inch handset screen launches, prior to the 2014 holiday season.

Above all, the cloud computing revolution is directly related to the secular shift away from desktop computing towards mobile devices. Through cloud computing, consumers can assign data to virtual servers and return to access those same files through various desktop and mobile machines. On March 27, 2014, Microsoft offered limited iPad access to its Office software suite via separate and free Word, Excel, and PowerPoint downloads at the App Store. Apple iPad users must purchase Office 365 subscriptions to create new documents and complete what Microsoft has referred to as "robust editing." Office 365 subscriptions do allow for cloud computing between multiple combinations of desktops, tablets, and smartphones available to both private individuals and large enterprises. Apple will collect 30% commissions off each Office 365 subscription sold through its App Store. In any event, Apple remains well-poised to build upon existing consumer electronics trends throughout the course of 2014.

Meanwhile, BlackBerry was literally forced into allowing its long-standing licensing agreement with T-Mobile (NASDAQ:TMUS) to expire last April 25. In a February mailing, T-Mobile targeted BlackBerry customers with a limited-time offer to exchange their handsets for the Apple iPhone 5S. Terms of the offer allowed BlackBerry owners to purchase the 5S with no annual service contact and no money down. After making the exchange, the iPhone was to be paid off in $25 monthly installments over two years. T-Mobile pitched the iPhone 5S as an "upgrade" into an Apple ecosystem of "powerful communications and productivity apps." In a terse blog, BlackBerry CEO John Chen attacked T-Mobile decision makers for their "clearly inappropriate and ill-conceived marketing promotion." T-Mobile, however, promptly responded to John Chen's "outrage" and "powerful message" with a new deal to pay $200 in rebates to BlackBerry customers who exchanged their handsets for Samsung smartphones.

The Bottom Line

BlackBerry investors should not confuse financial engineering with the generation of real wealth. Fairfax Financial, BlackBerry's most powerful shareholder, also owns $1.25 billion in convertible bonds within the telecommunications company. Terms of the debenture agreement granted the Fairfax consortium rights to convert bond principal into BlackBerry stock at $10 per share. Full conversion of the Fairfax position may ultimately add 125 million shares to the BlackBerry balance sheet. BlackBerry closed out its most recent quarter with a mere 526.5 million shares outstanding on the Q4 2014 books. BlackBerry shareholders are therefore being exposed to 23.8% ownership dilution. Fairfax, as a bondholder, would maintain asset rights above those of shareholders, in the event of bankruptcy.

Be advised that the $1.25 billion convertible bond deal has literally kept BlackBerry afloat. BlackBerry racked up a staggering $5.9 billion in fiscal 2014 losses. If not for $1.3 billion in tax credits, BlackBerry would have actually posted $7.2 billion in net losses for the latest year. Q3 2014 did include $2.8 billion in asset write-downs, which were largely related to the disastrous BlackBerry 10 launch. As of March 1, 2014, the BlackBerry balance sheet listed out $2.7 billion in cash and investments above $3.9 billion in liabilities. Over the past year, BlackBerry collected upon $1.5 billion in receivables, while also taking in a net $226 million through investment trading activities. By all accounts, the BlackBerry core business model collapsed towards the end of 2014. Shareholders should take a page out of the BlackBerry playbook, sell off their positions, and harvest losses as tax write-offs. For 2013, investors were able to deduct $3,000 in net capital losses directly off their 1040 tax forms. Going forward, the realized BlackBerry losses may help to offset the prospective gains via Apple stock come tax time.

On April 23, 2014, Apple reported financial results for its fiscal second quarter ended March 29, 2014. Apple generated $10.2 billion in net profit off $45.6 billion in second quarter revenue. In all, Apple posted its best results for any quarter outside of The holiday season. As somewhat of an adjunct to the results, Apple announced that it would be splitting its stock seven-for-one, while also expanding its capital return program by $55 billion to return a total of $100 billion back to shareholders via buybacks and dividends through the end of 2015. The June 7:1 split may also pave the way for Apple's eventual inclusion as a Dow Jones Industrial Average component stock.

The final Q2 2014 Apple balance sheet did list out $150.6 billion in cash and investments above a mere $85.8 billion in liabilities. The liabilities side of the ledger did include $8.3 billion in deferred revenue, which will eventually transition over to the net income statement. Apple's clean balance sheet is largely a reflection of the company's ability to generate $36.2 billion in Q2 2014 cash flow from operations. BlackBerry, for its part, closed out the May 2, 2014 trading session at $8.15 per share. At these levels, Wall Street traders have effectively applied a $4.3 billion market capitalization price tag to BlackBerry. Still, Apple has responded to any outright takeover overtures out of the BlackBerry camp with deafening silence.

Billionaire investor Carl Icahn may describe our trade proposal as a "no brainer." Liquidate BlackBerry positions. Buy and hold Apple shares for the long-term.

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.