BlackBerry - Some Roads Aren't Meant To Be Traveled Alone

Introduction

BlackBerry (BBRY) has been one of the most traded technology stocks in the last couple of months. This Canadian smartphone maker was given up for dead, as it failed to keep up with the technological improvements made by the Apple (AAPL) and Samsung smartphones. BBRY failed to adjust itself to the tectonic shifts in the smartphone industry, toward touch screens and consumer markets. The company was very late to move into this segment and never had products that were as good as the iPhone. BBRY's new BB 10 operating system and smartphones (Z10) hope to cover the lost ground. However, it will be impossible for BBRY to regain its lost market share as the smartphone industry has rapidly evolved since its leadership days. BBRY is now directly competing with the biggest companies. To match their size and power, BBRY needs more resources. While the company's new products may or may not succeed, BBRY will benefit from a bigger parent as it is tough for it to compete alone. BBRY's current valuation is quite cheap and it represents an attractive target. We think BBRY's acquisition will represent a win-win situation for both parties.

Android has led to the commoditized smartphone industry in a much shorter time frame

Google's (GOOG) Android operating system has leveled the field for a number of small smartphone companies that did not have the wherewithal to build and support an operating system with its attendant applications. Now, small companies like Micromax and Lava can compete with technology behemoths like Samsung on almost equal terms. The PC industry took a long time before it became a commodity industry. IBM got out of the PC business a long time ago seeing the commoditized trend. The smartphone industry is showing the same trend in a much shorter time frame. Like Macintosh computers, there will be demand for premium products in the smartphone industry as well. But the premium segment is already crowded with Samsung and Apple launching new products every six months or so. It will be difficult for BBRY to grow, given the high competition in both the upper and lower ends of the smartphone market.

Reasons why BBRY can't survive alone

1. No more unique - BBRY used to command the smartphone market in the U.S. due to the reliability, quality and security of its services. However, failing to keep up with the fast changing technology, the industry has made the company a marginal player. The company is even losing out on its strong enterprise segment, where more enterprises (Home Depot) are starting to switch to other phones and ecosystems. BBRY's ascent was built on its unique "push email" application, which provided great value to the enterprises. But with this application becoming free and available in almost all the smartphones, BBRY does not have anything unique left to offer to its customers.
2. Fringe Player in the U.S. market - BBRY has become a fringe player in its core U.S. market where its marketshare is now less than 5%. Android and iOS have captured almost ~90% of the U.S. smartphone market and Microsoft is deploying its massive resources to become a meaningful player here again. We do not think a low market share as a bad thing, because you have room to grow. However, you must come up with a compelling product or service, which will make the users want to switch. While BBRY 10 has some good features, it is not offering something distinctly unique.
3. Emerging Markets have heightened competition as well - Apple is not strong in the emerging markets and is only now starting to focus on these regions. The reason is that Apple earlier had enough growth coming from the developed markets and did not spare the management bandwidth to expand into markets like India (most iPhones used to be brought into India through grey/ black channels). However with Apple's growth slowing down, the company is focusing on markets like India and China. BlackBerry has a higher smartphone market share in places like India compared with the U.S., because of its brand and reputation. However, the company has not managed the onslaught of Android based smartphones well. The buzz around new smartphones is around local players like Micromax, Samsung, Karbonn and Lava. We hardly see much advertising or buzz around BlackBerry anymore.
4. Size - BBRY suffers from a lack of size as compared with its main competitors who can outspend BBRY on both marketing and research spends. Google is a dominant player in the smartphone industry though it hardly makes much profit from this segment now. The company has spent a huge amount to sell Android for free, just to ensure that its operating system is present in most of the smartphones sold today. BBRY is also thinking of getting out of the hardware race and focusing on selling software. However, it will be tough for BBRY to sell software in an area where the market leader is selling the same product for free.
5. Tough to be in both smartphone software and hardware - I don't think there are many companies that can afford to invest in both smartphone software and hardware. Nokia (NOK) has got out of the smartphone operating system despite having a good operating system with a leading market share (Symbian). The company's management realized that it could not afford in both hardware and software. NOK has now aligned itself completely with MSFT. While Google bought Motorola to become a major smartphone producer, it was more to protect itself from the patent wars. Google wants to remain a leader in the smartphone O/S space. Samsung, which is the largest smartphone seller in the world today is present only in smartphone hardware using software from Google and MSFT. Only Apple has the resources and marketing strength to remain a supplier of both the smartphone O/S and hardware. We do not think BBRY has the resources to remain in both hardware and software.
6. You can't be just a smartphone seller any more - The boundaries around different form factors such as smartphones, tablets, PCs are collapsing. It is no longer possible to be just a smartphone vendor or just a PC vendor. The world's largest PC vendor HP introduced a tablet product, which failed and had to be withdrawn. But HP's management knows that it cannot survive solely on PCs and plans to introduce a tablet again. The company is also making a PC tablet hybrid like the other PC vendors. BBRY will also have to introduce successful phablets and tablets and cannot afford to just sell smartphones. Its Playbook was a failure like HP and Dell (DELL) tablets.
7. Do we have room for four mobile software eco-systems - Apple and Google have already established their software ecosystems in both the tables and smartphone space. These two companies do not face any imminent survival threats as far as we can see. Microsoft (MSFT), the sleeping Seattle giant is now making a huge push into the mobile operating system space, after doing nothing most of the last decade. The company is dead serious as MSFT not only made the newest version of the Windows O/S more smartphone and tablet friendly, but actually introduced two tablet products in the market (Surface RT and Surface Pro). The sheer size and power of the MSFT empire will ensure that it will gain at least a double-digit market share. We are not sure if the smartphone industry has space for one bigger player. Competing in an industry not only requires good products/ services, but also requires marketing heft. Windows was never the best operating system for PCs, but still it continues to have a monopoly position.

Summary

BlackBerry stock is quite cheap with a P/S and P/B of 0.6 and 0.8 respectively and more than $2.5 billion in net cash. The market has already discounted many of the risks that BBRY faces. The stock has been very volatile of late, as investors cannot decide one way or the other, whether BB 10 can resurrect the company's failing finances. The company has an EV of less than $5 billion, which makes it an easy acquisition for a big technology company. One of the big Asian players such as Samsung or Lenovo could buy the company after paying a decent takeover premium for its prized assets and technology. HP bought Palm while Google bought Motorola . We think BBRY needs to find a buyer as well, to ensure that its iconic brand and products live on to fight another day.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.