BlackBerry Passport: No Killer App, Investors Lose

| About: BlackBerry Ltd. (BBRY)

Summary

BlackBerry is set to launch its Passport phone prior to the holiday season, as part of an ongoing turnaround plan.

The Passport is most notable for its box-like shape, but lacks a "killer" application.

A weak Passport launch will result in more losses for the BlackBerry bottom line. Conservative investors should avoid BlackBerry stock.

Last June, BlackBerry (NASDAQ: BBRY) CEO John Chen first unveiled the Passport in a limited showing at the company's annual general meeting in Waterloo. Initial reviews of the Passport have all centered on the box-like physical dimensions of this handset. Gimmicks, however, always fail to impress serious investors with real money on the line. In his July 29 ZDNet piece, Larry Dignan dismissed the BlackBerry Passport simply as an "odd creature." The Passport apparently lacks the "killer," or revolutionary, application necessary to shake-up the mobile industry and deliver market share for BlackBerry.

The Mobile Market

On June 23, 2008, Wall Street traders bid BlackBerry shares to an all-time high at $147.50. At the time, BlackBerry was actually worth roughly $85 billion, in terms of market capitalization. An iconic 2008 photograph of then Presidential candidate Barack Obama captured the apex of the BlackBerry movement. At the time, BlackBerry was the preferred brand for corporate executives, bureaucrats and IT professionals who were in the market for security and productivity features. At its peak, BlackBerry leveraged this business model to control roughly half of the mobile market.

BlackBerry stock closed out the August 15 trading session changing hands at $9.59 per share, which also calculated out to $5 billion in market capitalization. BlackBerry executives have somehow managed to burn through $80 billion in shareholder value over the course of six short years. A haughty BlackBerry founder Mike Lazaridis once wrote off the iPad tablet as "amateur hour." Ironically, it was Apple (NASDAQ: AAPL) that ultimately took the lion's share of mobile profits, largely at the expense of BlackBerry. Apple pioneered the ecosystem concept, where consumers began to access telecommunications, computing and entertainment through a largely integrated network of machines.

On August 6, 2014, research firm comScore published its June 2014 U.S. Smartphone Subscriber Market Share report. Be advised that the title of the report was somewhat misleading, as comScore statisticians actually presented averages of data taken from the April to June quarter. According to comScore, Google (NASDAQ: GOOG) (NASDAQ:GOOGL) Android (52.1%) and Apple iOS (41.9%) systems combined to operate 94% of the U.S. smartphone market through the spring months. On the handset side of the ledger, Apple was also the leading original equipment manufacturer with its 41.9% share of this market.

For the sake of comparison, BlackBerry closed out the April - June quarter clinging to a mere 2.3% of the U.S. smartphone market, after having lost 60 basis points in share through the time frame. Successive reports out of IDC have also confirmed the dominance of the Android - iOS duopoly above the tablet market, with BlackBerry remaining all but irrelevant in this space. Going forward, the deep pocketed Microsoft is most likely to further entrench Windows as the third wheel alternative to Android - iOS in mobile. Microsoft officially closed out its $7.2 billion acquisition of Nokia Devices and Services last April.

BlackBerry Passport Specifications

The term "phablet," of course, is a play upon words that suggests traditional smartphone and tablet features may be fused together within one machine. As such, phablets are most notable for their large screens relative to standard smartphones. Online technology journals Tech Radar, Phone Arena and Pocket Lint, have all identified the Samsung Galaxy Note 3 and Nokia Lumia 1520 as the two best phablets now out on the market. The Samsung Galaxy Note 3 screen does measure out at 5.7 inches, diagonally. The looming iPhone 6 launch is also set to branch off into two separate 4.7 and 5.5-inch screen handsets prior to the Holiday Season. As such, the mobile market is becoming increasingly saturated by the day. Without a killer application, BlackBerry will again fail to close significant sales and improve operations.

For its part, BlackBerry has aggressively played up the size and shape of its new Passport phone for "breaking design boundaries." According to BlackBerry, rectangular smartphones have remained somewhat limited in regards to their web browsing and work productivity capabilities. BlackBerry now cites academic research that deems 66 characters as "optimal" for each line within a book. The 4.5-inch square screen Passport is capable of displaying 60 characters, horizontally. For the sake of comparison, BlackBerry claims that most rectangular smartphones only present roughly 40 characters. Beyond the physical dimensions, the Passport also includes four separate microphones and what BlackBerry hails as the "largest smartphone battery on the market."

The Passport, of course, features the QWERTY keyboard that is somewhat of a BlackBerry trademark. BlackBerry now markets the Passport as the ideal device for web browsing, analyzing documents and enjoying e-books. Apparently, real estate, healthcare, literary and financial professionals will covet the Passport. Still, the Passport would serve a niche market of white-collar types and BlackBerry diehards, at best. In a case of déjà vu - it was this relatively limited approach that doomed the Z10 to failure.

The Bottom Line

Again, BlackBerry stock closed out the August 15, 2014, trading session at $9.59, per share. In all, the $9.59 price calculated out further to $5 billion in market capitalization. Be advised further that the BlackBerry balance sheet listed $6.8 billion in assets above $3.1 billion in liabilities, as of May 31, 2014. Of this amount, the asset side of the ledger did include $2.5 billion worth of intangible assets, long-term investments, inventories, and property, plant and equipment. Many of these assets may actually be written down and off as expenses, if BlackBerry were to rack up significant losses over the next year, in the aftermath of a weak Passport launch.

For this latest quarter, BlackBerry did post $6 million in losses before income taxes upon $966 million in Q1 2015 revenue. As such, the $23 million in first quarter profits were largely the result of the application of $29 million in tax credits, in conjunction with a $669 million improvement in debenture fair value adjustments above Q4 2014. Going forward, the Passport launch is likely to add $1 billion in selling, marketing and administration costs to the BlackBerry income statement over the next two quarters. The Passport, however, may only generate a mere $500 million in revenue, if BlackBerry were to ship 1 million of these handsets at an average price of $500 through fiscal 2015.

Last year, a consortium of institutional investors led by Fairfax Financial began to purchase $1.25 billion in BlackBerry convertible debentures. Terms of the deal granted bondholders rights to convert principal into BlackBerry stock at $10 per share. Full conversion would therefore result in 125 million additional shares to a balance sheet of only 525.9 shares of common stock outstanding. BlackBerry shareholders must therefore stare down the prospects of significant 23.7% ownership stake dilution. As such, conservative investors should avoid buying into BlackBerry stock.

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.