On June 23, 2008, the then Research in Motion stock established an all-time high, at $147.50 per share. The $147.50 share price also calculated out to an $82.6 billion market capitalization price tag for the Research in Motion business model. An iconic 2008 photograph of Presidential candidate Barack Obama captured the apex of the BlackBerry (NASDAQ:BBRY) revolution. At that time, BlackBerry leveraged its reputation for clean engineering and ironclad security features to cultivate IT professional, seasoned executive, and high-level bureaucrat business. At its peak, BlackBerry controlled roughly half of the smartphone market.
BlackBerry shares closed out the June 13, 2014 session changing hands at $7.89, which then calculated out to a mere $4.2 billion in market capitalization. At best, BlackBerry has transformed itself into Exhibit A: Case Study for Burning Through $80 Billion in Shareholder Wealth over Six Years. At worst, BlackBerry has degenerated into the laughing stock of Wall Street, where its shares are more so privy to speculation rather than the legitimate discount of real time results. Interestingly, the term "phablet" has emerged as the latest catchphrase to galvanize misguided BlackBerry bulls. Prospective investors, however, may be best served to take their cues from Redmond and Helsinki. The phablet concept failed to improve results at fellow felled giant Nokia (NYSE:NOK). For now, BlackBerry also lacks the deep-pocketed suitor to save the day.
Destroying $80 Billion in Shareholder Wealth
In his scathing 2012 "Research, No Motion" piece, Jesse Hicks best documents the collapse of the BlackBerry Empire. The editor's note did credit BlackBerry as the originator of the smartphone economy. From there, Hicks and The Verge went on to promptly rip BlackBerry as an "out-of-touch" and "provincial fiefdom." Hicks also juxtaposed BlackBerry as an enterprise company run by haughty, yet awkward electrical engineers, against Steve Jobs and Apple (NASDAQ:AAPL) who smartly delivered product to chic consumers. The "Research, No Motion" account further documented terse interviews, a security breach named "Dingleberry," and drunken executives engaging in fisticuffs.
BlackBerry actually declared "amateur hour" to be over upon the 2011 launch of its Playbook tablet. Prior to that event, co-founder Mike Laziridis was quoted as attributing marketing to "dumb down innovations" and "the kiss of death." Ironically, Lazaridis' veiled potshots at Apple and its iPad would ultimately drive BlackBerry towards collapse at Waterloo. All recent estimates out of research firm International Data Corporation have identified Apple as the top tablet vendor on the global marketplace. Last year, Apple shipped 71 million iPad units to generate $32 billion in fiscal 2013 sales. In all, Apple closed out its latest 2013 fiscal year having posted $170.9 billion in net sales and $37 billion in net income.
Apple's torrid financial results, of course, have attracted fierce competition into the mobile market. Over time, Android was to emerge as the second half of a duopoly that now dominates mobile. The Google (GOOG) (NASDAQ:GOOGL) business model works to literally give product away, in order to drive traffic towards higher margin online businesses. As such, Microsoft (NASDAQ:MSFT), Nokia, and BlackBerry will continue to fight a losing war at both the premium and value fronts. On June 3, 2014, research firm comScore (NASDAQ:SCOR) published its April 2014 U.S. Smartphone Subscriber Market Share report. Taken together, Android (52.5% share) and iOS (41.4% share) systems operated 93.9% of American smartphones through April 2014. Meanwhile, BlackBerry actually lost 60 basis points in share to close out this latest period clinging onto a meager 2.5% of the U.S. smartphone subscriber market. Going forward, BlackBerry phablet scuttlebutt will prove to be somewhat inconsequential.
Deconstructing BlackBerry Phablet Scuttlebutt
Earlier this month, amid the Z3 launch in Indonesia, CEO John Chen intimated that BlackBerry was set to bring a phablet to market by the end of this year. Chen responded to a Jakarta Post interview thusly:
If we will do another thing, we will probably go to phablet. I think the phablet could be early, the tablet is already late. That is not a bad thing, because you can bring new technology.
The term "phablet," of course, takes its name from the combination of traditional smartphone and tablet features within one machine. Heading into 2014, technology magazine Pocket Lint identified the Samsung (OTC:SSNLF) Galaxy Note 3 as the best phablet on the market. The Samsung Galaxy Note 3 weighs in at 168 grams, while also standing 5.95 inches tall by 3.12 inches wide. The Galaxy Note 3 does feature a 5.7-inch screen that displays graphics in 1080 X 1920-pixel resolution.
For the sake of comparison, the iPad Mini features a 7.9-inch display that presents graphics in 1024 X 768-pixel resolution. Year-over-year Apple iPad revenue did decline by 13% from $8.7 billion to $7.6 billion between Q2 2013 and Q2 2014. Last May, International Data Corporation revised its tablet forecast sharply downward from 19.1% to a projected 12.1% year-over-year growth rate through 2014. Tom Mainelli, IDC Program Vice President, cited the "rise of phablets" as having consumers "second-guess tablet purchases."
Be further advised that the technology commentariat has already speculated that the looming iPhone 6 launch will break off into two wings. Mac Rumors has made the claim that the iPhone 6 launch will include separate 4.7-inch and 5.5-inch phones. Forbes recently went so far as to release front-and-back renderings of the alleged iPhone 6 models. IDC would define the 5.5-inch iPhone 6 as a phablet.
BlackBerry bulls would be putting the cart before the horse, if they assume that a phablet out of Waterloo would immediately compete against the likes of Apple and Samsung. At best, the BlackBerry phablet would match Nokia's efforts. Pocket Lint ranked the Nokia Lumia 1520 as the second best phablet on the market headed into 2014. From there, the online magazine went so far as to laud the Lumia 1520 as the best Windows 8 device ever released. Despite these accolades, Nokia Discontinued Operations still racked up $414.3 million in operating losses off $2.6 billion in Q1 2014 revenue. Nokia Discontinued Operations quarterly revenue did decline by 30% on a year-over-year basis. Nokia Discontinued Operations, of course, represented financial results for the former Devices and Services unit. Microsoft closed out its $7.2 billion acquisition of Nokia Devices and Services on April 25, 2014.
The Bottom Line
Two major moves made out of desperation will cap the upside potential in BlackBerry shares, while investors are still exposed to downside risks. On November 4, 2013, BlackBerry issued a press release that Fairfax Financial and a consortium of institutional investors would be taking down a $1 billion private placement of 6% convertible debentures in BlackBerry. Terms of the agreement granted rights for the bondholders to exchange principal for BlackBerry stock at $10 per share. On January 8, 2014, Fairfax Financial exercised options to take down another $250 million in the 6% convertible debentures. In all, full conversion of the $1.25 billion position would add 125 million shares to the BlackBerry balance sheet. BlackBerry shareholders are therefore exposed to the risk of severe 23.7% ownership dilution (526.6 million BlackBerry voting common shares issued, as of March 1, 2014).
On December 23, 2013, Bloomberg reported that BlackBerry had negotiated a deal with Taiwanese contract manufacturer Foxconn to produce its handsets and manage inventory. BlackBerry, of course, would be responsible for quality control, while still maintaining rights to its patents. Going forward, the deal would curtail the risks of embarrassing inventory write-downs at Waterloo, and also shift cost of hardware sales over to Foxconn. For its efforts, Foxconn would take a cut out of profits upon each unit sold. A successful phablet launch may therefore carry a somewhat limited trickle down effect in terms of driving the BlackBerry bottom line towards real profitability.
Last year, BlackBerry racked up $5.9 billion in net losses. For its fiscal 2014, BlackBerry actually applied $1.3 billion in tax credits to ease the burden of bearing the brunt of $7.2 billion in operating losses. On March 1, 2014, the BlackBerry balance sheet itemized $7.6 billion in assets above $3.9 billion in liabilities. Over the past year, BlackBerry collected $1.5 billion in receivables, while also working off $359 million in inventory. Perhaps most importantly, BlackBerry wrote down $3.2 billion in long-term investments, intangible assets, and property, plant, and equipment over its latest fiscal year. In theory, assets that cannot be leveraged to turn profits will depreciate towards zero. As such, BlackBerry shareholders should consider immediately selling out of their positions, in order to avoid further losses.
Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.