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Summary

  • Z3 is a good phone, but the other smartphone makers have launched even better phones at lower prices.
  • The new markets that BBRY is entering are still immature.
  • The company is still losing cash and will not be profitable till FY 16.

BlackBerry (NASDAQ:BBRY) has probably realized with the failure of its flagship BB 10 smartphones, that people will not pay premium prices for its smartphones anymore. The company had to book massive losses on Z10 and Q10. BBRY reported large billion dollar losses, after it wrote down the value of the inventory of the premium smartphones. The company had to completely revamp its strategy, since insolvency became a real possibility after the massive cash burn. BlackBerry like Nokia (NYSE:NOK) made massive changes in 2012, to face the onslaught from Apple's (NASDAQ:AAPL) iPhone and Google's (GOOG, GOOGL) Android smartphones. The company's new BB 10 has received good reviews, but the company probably did not have the marketing power to compete with the technology giants such as Microsoft (NASDAQ:MSFT) and Google. I had earlier said that BBRY needed to partner with a bigger, richer company to provide the marketing and distribution muscle for its smartphones. BBRY tried to find a buyer but failed leading to more issues for the company. Under the leadership of John Chen, BBRY has tried a new lower capital intensive strategy. BBRY is partnering with one of the largest electronics producers to build smartphones for emerging markets. The new Z3 phone has been launched in Indonesia in a pretty short time period. But I don't think that it can resurrect BBRY's declining smartphone sales, as MSFT and Lenovo have taken low cost smartphone to a new level with the launch of the Nokia X and Moto E smartphones. BlackBerry is trying very hard to come back through innovative strategies but given the strong competition, I would still wait on the sidelines and avoid BBRY stock currently.

BlackBerry burnt its fingers badly with high priced BB 10 smartphones

I had criticized the pricing policy of BBRY since the launch of the Z10 and Q10 phones last year. The smartphones were priced like the leading smartphones from Apple and Samsung. The company hoped that its brand name and good quality of its smartphones would lead consumers to buy its expensive phones. However, BBRY lacked the marketing power or the status value of its premium segment competitors. Very few people were willing to pay such a high price for a smartphone which did not have a good app system and whose operating system had a big learning curve. Marketing and distributing these smartphones in multiple countries was also a challenge for BBRY, which became weak over the last couple of years. The smartphones bombed badly leading to a huge inventory overhang for the company. The Z10 is now available for just ~$200 which is almost ~70% lower than its launch price last year.

Z3 seems a great smartphone at a great price but Android competition is stifling

BBRY's stock price saw a jump after John Chen announced a new strategic partnership with Foxconn. This partnership would help BBRY sharply cut its inventory and distribution costs. Foxconn could also use its massive scale to buy smartphone components at a much cheaper cost than BBRY. The Z3 looks to be a great smartphone at a great price. However, Android makers have not been sleeping on the wheel. Lenovo has introduced a great smartphone Moto E at a cutthroat price. After buying Motorola, Lenovo has become one of the strongest players in the smartphone market. The company not only has great production and distribution strengths, but now also has a good brand. The other local Android smartphone sellers such as Xiaomi and Micromax are also releasing improved Android hardware at a rapid pace. Nokia has also entered below the $200 smartphone market, aggressively marketing its own version of Android software. Microsoft and Android companies have much higher financial capabilities as well as good brands and a popular operating system. While Z3 is a great phone, I don't think that BBRY can make it a serious contender. Z3 will need to be much better than the Android smartphones in order to gain marketshare. Just being at par will not help, as it has to displace established players in the market.

Motorola's budget smartphone Moto E, which got sold-out on the very first day of its launch on 14 May, has been made available on Friday (23 May) with limited stocks. Motorola's official e-retail partner, Flipkart had stocked 20,000 units in its inventory at the time of sale on Friday and within half hour of the re-launch (11:00 am), the website has crashed, probably due to heavy user-traffic

Source - IBTimes

MDM and Internet of Things market are still in their infancy

BlackBerry wants to become a software and services player, but the markets it operates in are still in the development stages. The Mobile Device Management (MDM) market is still developing, while Internet of Things (IOT) is not generating too much revenues either. The other software markets such as instant messaging and automobile software are crowded and still small. It will take a lot of time for BBRY to develop them into big revenue generators. BBRY service revenues will decline as more corporate IT departments look to adapt to Apple's iOS and Android operating systems.

Financials do not look that great either

BlackBerry will not be profitable till FY 16 in the most optimistic case, as per the management. The company has already done a lot of restructuring such as selling real estate assets and cutting staff in order to reduce expenses. However, profitability seems still far away. The company cannot generate too much profit from the sales of low priced smartphones. It will also have to share a large chunk of profits with Foxconn. Services revenue is declining, while software revenue is not growing fast enough. While the company is sitting on a comfortable amount of cash, BBRY is also losing cash every quarter. One year ago, BBRY's stock seemed cheap due to the large amount of cash on the balance sheet. But a large part of it has declined due to the billion dollar losses. The company cannot afford any more strategic failures such as the Z10.

Upside Risks

Top smartphone companies don't die but are sold off

I have advocated in the past that BBRY might be better off selling/partnering with a bigger technology player. The smartphone market has become a global one these days and requires huge resources to maintain a global distribution and marketing network. A lot of Samsung's success in recent times can be attributed to its massive marketing spend, as it saturates the airwaves with its product advertisements. BBRY has got some terrific assets and it is amongst the few smartphone vendors trusted by government agencies to provide secure communication. BBM is still quite popular, while its patent portfolio is also valuable to the big technology players such as Google and Apple. It is rumored that Lenovo (OTCPK:LNVGY) offered to buy the company last year, but was refuted. As the stock price goes lower, the company becomes more and more attractive to the technology giants such as Samsung (OTC:SSNLF). Most of the large smartphone companies such as Palm, Nokia, and Motorola etc. did not go bankrupt but were sold off to large companies such as HP.

Stock Valuation and Performance

BlackBerry has a market valuation of ~$3.8 billion and trades at a low valuation with a P/B of 1.1x and P/S of 0.6x. BBRY will not be profitable in 2014, so valuing it using the P/E ratio does not make sense. The stock is trading at less than half of its 52 week high of $15 and has declined by ~32% in the last 3 months, though it is roughly flat year-to-date. After the euphoria of the Foxconn partnership, the stock has started to decline once again because of the weak operational performance.

Summary

I think that BBRY is fighting a losing battle in smartphone hardware. Most of the smartphone market has become a commodity market like the PC market with low margins. The real battle is in the smartphone software and services market, which has a huge potential for all technology companies. Google had always focused on increasing its software market share and now Microsoft is doing the same by giving its Windows operating system for free to the hardware vendors. BBRY has a tough job in making its BlackBerry operating system relevant in a market dominated by giants such as Apple, Google and Microsoft. Z3 is a good product at the right price, but I don't think that BBRY can become a major player once again given the competitive landscape. The best case for BBRY still remains that it sell itself to a bigger technology company. I would avoid BBRY stock and consider the stock at only lower levels.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: BlackBerry - Z3 Seems Too Late To The Party