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Gonzalo Carrasco
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I have a BA in Economics and another in Political Science. I've been working for the past 3 years in the investment banking industry, where I've been involved in several IPO's. This experience has taught me where to look when assessing a company's potential in creating value. I recently passed... More
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  • The "BlackBerry Will Disappear In 2015" Nonsense

    Every year for the past few years, 24/7 Wall St has published its list of "10 brands that will disappear". They recently published their predictions for 2015, listing BlackBerry (NASDAQ:BBRY) as a likely bankruptcy candidate.

    24/7 Wall St is a financial news blog whose business model is based in generating traffic to sell advertising space. While they might produce some worthwhile articles (I really don't know since I hardly read them), it of course pays well to throw sensationalist headlines to get attention.

    With their list of soon-to-be bankrupt companies they are successful with their main intent: making some noise. Their recent list was widely republished by a number of media outlets.

    In this article, my goal is to weight 24/7 Wall St's arguments regarding the so called upcoming disappearance of BlackBerry.

    24/7 Wall St Track Record

    In their latest article, they claim to have a 49% record (24 out of 49) and bloat that its "impressive" given that these companies were chosen from "thousands". However, given that they choose companies whose revenue and profitability have dropped precipitously, what is impressive is that they do no better than simply flipping a coin. Anyone could have predicted that Palm would eventually disappear back in 2010 or Blockbuster in 2011, to name a few of their "stellar" predictions.

    I took the task of verifying their track record myself. If you search their site, they have been publishing their "10 Brands That Will Disappear" series for the years 2010-2015, which give us 40 predictions (2010-2013) to evaluate.

    To evaluate if their claims were successful I take their title literally: they were right only if the brand in question ceased to exist. That caveat exempts companies such as MySpace, which was taken private and re-launched, but is still active under its own name.

    Using various sources, I could only come up with 13 disappeared brands out of 40 candidates, a hardly impressive 32% hit ratio. If I break this numbers down per year, only in 2010 were their predictions equally successful than flipping a coin. Worthy of note is that this blog had already "predicted" BlackBerry's disappearance in 2013.

    (click to enlarge)

    Source: My own calculations, using 24/7 Wall St's articles,Wikipedia and various companies' websites.

    BlackBerry's Disappearance

    The blog's methodology for selecting its soon to disappear companies is listed as follows:

    1. Declining sales and losses;

    2. Disclosure by the parent of the brand that it might go out of business;

    3. Rising costs that are unlikely to be recouped through higher prices;

    4. Companies that are sold;

    5. Companies that go into bankruptcy;

    6. Companies that have lost the great majority of their customers; and

    7. Operations with withering market share.

    Most of the points out of this criteria are quite obvious and probably correct. I agree that a company that meets some or all of this points is surely in trouble and has a relevant probability to disappear from its market. Nevertheless, one important shortcoming of this list is a metric to assess whether or not a turnaround might actually keep the brands from disappearing.

    Take BlackBerry as an example, if the company had insisted with Thorsten Heins strategy I would completely agree with the chances that it might go out of business by next year. However, the blog doesn't account for the new management's business plan under John Chen.

    In line with its announced criteria, the blog's bases its prediction on BlackBerry on the following arguments:

    1. BBRY's market share in the global smartphone market declined from 19.5% in 2008 to less than 1% by late 2013.

    2. Sales of the Z10 and Q10 were abysmal.

    3. While QNX is now a leading OS in the auto and health care industries, its inadequate on its own to make the company viable.

    4. Revenue has continued its decline.

    Taken at face value, this arguments should worry an investor who has slept since John Chen took the reins of the company and doesn't really know that much about BlackBerry.

    Let me frame my response to 24/7 Wall St. as a revenue-cost problem. I'll start first with revenue.

    I was amazed that the blog pays no attention to the fact that hardware isn't the most important business division for BBRY anymore. In the most recent earnings report, out of BlackBerry's total revenue of $966 million, hardware accounted for only 39%.

    The handset division, which only one year ago at fiscal 1Q14, generated a $2.1 billion top line, is of course the great risk for this company. Nevertheless, in the worst case scenario, the Foxconn deal greatly reduces BlackBerry's liability. Fortunately, the scene isn't as bleak as shorts would want us to believe. The Z3 has gotten a warm reception in Indonesia and India, and probably other emerging markets will follow suit. In developed markets, I like the chances of the Classic and the Passport, which have so far gotten a mostly nice reception by the media.

    BlackBerry's market share has even increased in the US, according to Kantar, passing from 0.6% to 1.3% in May 2014 compared to May 2013. I expect the new devices to continue or even strengthen this trend.

    Moving to costs, John Chen has been incredibly successful streamlining the company's operations to stop the bleeding. BlackBerry even posted a small profit on its most recent fiscal quarter (albeit helped by fair value adjustments of the debentures). This company is in the right path to achieve profitability in the upcoming quarters.

    Conclusion

    Investors must view 24/7 Wall St with a lot of skepticism. Their "predictions" seem more like a publicity stunt than a serious analysis. Their arguments are outdated and their methodology has no way of accounting for the likelihood of a successful turnaround.

    Disclosure: The author is long BBRY.

    Jul 23 10:27 AM | Link | 2 Comments
  • BlackBerry Z3 Shows Strong Sales In India

    The business newspaper Economic Times India reports that the Z3 has almost sold out in the first two weeks since its launch.

    The newspaper cites some retailers that claim to have already sold about 75% of its Z3 stock.

    Strong sales in one of the most important smartphone markets in the world (India exhibited a 166% increase in smartphone sales growth in 4Q2013 and 104 million smartphone users) is great news for BlackBerry (NASDAQ:BBRY).

    If the Z3 can keep up with this momentum in other emerging markets, BlackBerry can begin to finally regain some market share away from Android devices.

    Given that most analysts expect BlackBerry's market share to practically drop to zero, even a small gain should provide a nice tailwind for the stock.

    Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in BBRY over the next 72 hours.

    Tags: BBRY
    Jul 13 11:37 PM | Link | 2 Comments
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