BlackBerry: This Is Just Plain Ugly

| About: BlackBerry Ltd. (BBRY)

As somebody who once used to love to play short squeezes (I still do, but not anywhere nearly as frequently), I can understand exactly why many traders and investors have taken an interest in beaten-down, highly-shorted BlackBerry (NASDAQ:BBRY). As we've seen with the likes of Tesla Motors (NASDAQ:TSLA) (and, to a lesser degree, pretty much every stock on this list), playing short squeezes is one of the must lucrative (and yet risky) investment strategies in the market. Things that are highly shorted are highly shorted for a reason, and it takes what is usually a very well thought out short thesis being proven wrong (or lots of Bearnake money...) to see that short interest unwind.

It seems that the resilient BlackBerry bears, that have been short this thing for quite a while now, are now reaping some serious rewards. That being said, while the most recent pre-announcement sure looks pretty ugly for the company (missing sell-side estimates by 50%, even though you didn't actually give guidance, is an epic fail), is it time to simply throw in the towel and sell your shares? Let's dig in.

The Good: There's Still A Buyout Story...

Well, the good news is that as the price keeps dropping, the odds of private equity taking the firm over and refitting it to be a cash-flow machine continue to rise. In fact, the 4,500 person layoff, coupled with a cash position that is still likely significant, seems to still keep this story viable, although the company can't take too many more of those $1B/quarter losses if it is to continue to be attractive.

The Wall Street Journal reports that former BlackBerry CEO Mike Lazaridis may be in talks with private equity to get the ball rolling, although these vague talks aren't necessarily worth betting your hard-earned investment dollars on. But for those of you who enjoy playing the roulette wheel and have a good understanding of the risks involved, this may be one reason to actually consider picking up the shares.

The Bad: More Than I Can Fit In This Subheading

It's clear that BlackBerry's devices aren't selling. We can speculate all day about why these devices aren't selling, but the truth of the matter is that they're not. Blame it on management, blame it on the fact that the BlackBerry name is not "cool" any longer, blame it on the carriers, or blame it on whatever you really want to, but the trend is very clear. Anybody buying BlackBerry shouldn't be doing so on the basis of an underlying business suddenly turning around - that's not a very likely (albeit not impossible) scenario.

Of course, add to this the fact that the short sellers now have very little reason to cover (and in fact may be piling on further in a bet that this stock will eventually go to $0) even with significant profits yet to be booked. Why cover a short on a name that continues to see worsening operating conditions and cash burn? The company might now be spinning a beautiful tale of how it's going to consolidate its product lines into just four phones, but now realize that by buying BlackBerry here, you're paying $1.97B for four smartphones and enterprise services. I would not be surprised to see this stock trade at an EV of $0 (i.e. $5/share) at some point in the very near future (and at that point, it'd probably be a pretty interesting buy).

Of course, add to this the fact that management is likely to continue its policy of not giving guidance, which means that after this little fiasco, the sell-side will want to err on the side of caution and keep future estimates quite muted, which means that - as if it were even possible - the stock will continue to screen poorly, and it will likely lose what little love it has left with the sell side.


I wouldn't be bold enough to short the stock here, as I'd still be pretty worried about a potential "buyout". That being said, the odds are that this stock goes lower and that the price you see today (~$9) will be the eventual "take-over" price (if it does indeed get taken over). So if you want to play a potential buyout, I'd wait until the stock starts trading at just about cash value (i.e. EV = $0) before speculating. There's not much in the way of a positive catalyst here in the near term, and I suspect that a combination of aggressive short sellers and longs who have had enough, will drive this stock lower before it gets any better.

This is just plain ugly.

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.

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