BlackBerry Shows No Signs Of A Turnaround

| About: BlackBerry Ltd. (BB)
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BlackBerry (BBRY) continues to bleed red ink in its operating performances with no clear sign of a turnaround. In fact, trends in revenues and operating income suggest that things might actually be worsening. Take a look at the past 5 quarters revenue figures:

Q4 2011: $5.2 billion

Q1 2012: $4.2 billion

Q2 2012: $2.8 billion

Q3 2012: $2.9 billion

Q4 2012: $2.7 billion

Over the past 2 years operating income has fallen from $4.6 billion to ($1.4) billion over the trailing twelve months. The question is: is this priced in the stock which is down about 90% from all time highs and about 85% from highs in 2009?

I would argue that until there are tangible signs of a turnaround in operating income or revenues, anyone buying the stock at these levels (which is up over 100% from the recent lows) could be at risk of significant draw downs out of nowhere.

In looking at recent corporate developments, the recent launch of the Z10 and its new operating system could be a catalyst for a turnaround. However, I'll take a look at the details of this new launch below to see if there may be reasons for optimism.

BlackBerry Z10:

BlackBerry recently launched its new operating system on its Z10 smartphone, which has been a long time coming. In many ways it reminds me of the BlackBerry tablets (what were they called again?) launched to much media hype but zero consumer fanfare. CEO Thorsten Heins recently admitted the tablet business as being a very tough business to operate in. The issue is not the specs of the Playbook. It is on par with competing products from Apple (NASDAQ:AAPL) and Samsung in terms of specs and price points. However, in the highly competitive consumer electronics market, first mover advantage is huge. And BlackBerry continually launches products well after its competitors. It seems like it is almost in their corporate culture to avoid sticking its neck out and innovating, rather waiting for the market to develop and reacting to it. Perhaps this is the best path for it to take, but I think it reeks of a lack of product innovation.

Anyway, getting back to the Z10, UBM Techinsights in Canada did an estimate of the cost to build the Z10 by tearing it apart and adding up the costs of its components. UBM estimates that the cost of the Z10 is $154 per unit, which is about 10% higher than the iPhone 5 at $139.20. Why is this important? Consider that Apple has been able to consistently charge premium prices for its products while its competitors including Samsung (SSNLF.PK) have been competing more on price, making it vital to operate at lowest cost. If BBRY is forced to compete on price then it's at a huge disadvantage if it is not the lowest cost producer.

In comparing the specs of the Z10 with the Galaxy S3 from Samsung, the leader in smartphone market share, let's look at each of its major components:

(1) Screen Size

Z10 screen size is 4.2 inches vs S3 at 4.8 inches. Given users tend to prefer larger screen sizes I would give the edge to the S3.

(2) Screen Resolution

Z10 and S3 have similar resolutions; however Z10 does have an impressive 355ppi vs 306ppi for the S3 so the edge goes to the Z10.

(3) Storage

The Z10 was launched with only one storage model: 16GB. The S3 offers 3 different storage options: 16GB, 32GB and 64GB. Both do offer the option of adding storage with card slots, but I'm not really sure why BlackBerry wouldn't offer more than one option. The edge goes to the S3.

(4) Processor / Performance

The S3 features a 1.4 GHz quad-core chip based on the ARM Cortex-A9 architecture. The Z10 has a 1.5 GHz dual-core processor, which is a less powerful processor. The Z10 does however have double the RAM as the S3, which puts it on par with the S3. The edge goes to neither.

(5) Camera

The S3 and the Z10 both have 8MP cameras and both record in HD 1080p. Again, the edge goes to neither.

Just based on the comparison with the Galaxy S3, I really see no compelling reason for anyone to switch. There is no single feature that jumps out as a must have that the S3 doesn't have. In fact, the S3 has a better battery life and software. Just yesterday James Faucette of Pac Crest said that sales of the Z10 are trending far below market estimates. He now pegs sales of the Z10 at 275k to 325k units in February, significantly below consensus estimates of 1 million. If that comes to fruition, it might be lights out for the stock.

And to top it off, my Goldman Sachs (NYSE:GS) indicator is in full red alert: GS upgraded BBRY three months ago and while shares surged afterward, they are only marginally above the $12 area they peaked at after the upgrade. If you don't know my GS indicator, it is this: GS consistently upgrades stocks or downgrades stocks at inflection points. Case in point, they recommended investors sell Nokia (NYSE:NOK) around $2 per share (while they were buying shares of the company according to the SEC filings), they recommended a sell on First Solar (NASDAQ:FSLR) at $12 per share, and they recommended people to stay away from natural gas (NYSEARCA:UNG) when it was around $1.90 to $2.00 mmBTU. I can go through an entire list of examples that back this up but needless to say, they oftentimes are recommending investors do the exact opposite that they are doing privately.

Anyway, with no clear catalyst in sight other than a surging stock price, I would recommend investors to be extremely cautious going long BBRY. A name change alone won't make this a better company. Instead, consider Sony (NYSE:SNE) or Nokia if you want exposure to the consumer smartphone market. Both have significantly more diversified businesses and much more upside potential. In fact, I have recommended both recently. See:

(1) Buy this Dip on Nokia

(2) Buy Sony Hand over Fist

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NOK over 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.