BlackBerry: It's Time To Take The Blinders Off

| About: BlackBerry Ltd. (BB)
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Summary

BBRY stock not caught up to BlackBerry the company, haunted by its failed past.

Stock price not reflecting the structural changes implemented by new leadership.

Solid product, process and people will carry BBRY into the future.

Author UpdateMar. 2, 2015, 11:35 PM

I am quite pleasantly surprised at the tenacity at which John Chen has been partnering with other companies, that were easily considered their rivals, such as Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Samsung (OTC:SSNLF).  Monday's announcements at the Mobile Congress expo are yet more points that highlight JC as a turnaround specialist.

Further pleasantly surprised at the reception of BlackBerry devices at AT&T (NYSE:T) & Verizon (NYSE:VZ) stores, where the employees knew of the devices, and were quite excited about them.  In the instances when I asked, the employees quickly connected BlackBerry to Business.

More circumstancial data points to a strong BlackBerry Passport market, where on many forums, a used device is still selling for over $500 with high demand.  Unfortunately the second hand market for the Classic is more mixed with devices selling as low as $300.

Want to get it out here up front. I am a Blackberry (BBRY) customer. I am also long BBRY stock, after I purchased my Blackberry Passport. I am short near month, out of the money calls to generate income and lower my cost basis. I am a Registered Investment Advisor, however we typically do not recommend individual securities. This is not a recommendation to buy or to sell, but rather my thoughts on why I am long Blackberry.

There is often a disconnect between the company and the stock. In the short term, the popularity of the stock may not reflect the true nature or fundamentals of the company. This mispricing may create valuable opportunities to buy long term value, on short term clearance pricing. We had seen a lot of these values in 2008 when retail investors were running for the hills. We see it today in a number of beaten down stocks of companies who are haunted by their past and current lack of popularity, however overlooked for the deep value they present. Those are my favorite types of investments.

One of Warren Buffett's famous mantras for investing is investing in what you love and understand. "Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful"."

Next, you have a philosophy of investing in what you hate, such as paying for parking, your phone bill, your cable bill, your utilities or that mortgage. This typically represents consumer staples which are tough to replace.

Lastly, to quote Warren Buffett again, "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

As a business owner, I can think of only a few companies that fits all three of the criterion for investing. That company is BlackBerry.

When I was young and had my first job working the sales counter at Staples, many successful people came in looking for office supplies and technology. One of their staples was the BlackBerry device on their belt in the holster. Sometime later, I found out the meaning of "crackberry" when my brother came home with the BlackBerry given to him at work. I quickly realized that the BlackBerry was more than a phone, it was a productivity device that makes things happen, for the small solo employee entrepreneur, to the most powerful man in the world, the President of the United States.

When you absolutely, positively, need to communicate and get things done on the go, you go for the BlackBerry device.

When I started in financial services my second device, after my Palm Treo was my BlackBerry Curve. Ever since then, I have always had a BlackBerry device as my main device. BlackBerry made me a more productive and successful person, without a doubt. That is why I LOVE my BlackBerry, and thus satisfying Warren Buffett's first criterion, invest in what you love.

Secondly, BlackBerry is also a company that I HATE. I hate the fact that I have to buy BlackBerry devices for myself and my staff because I operate in a business with a need for security. Nothing else in the mainstream provides the security I need for myself and my business, from secure instant communications, including messaging and email, to soon having encrypted voice and text. My clients do not need to fear of their information being vulnerable due to the regular hacks and vulnerabilities found on Android and iOS systems. I hate having to pay for new BlackBerry devices, but much like the majority of the G10 countries, there is no viable replacement that can do what BlackBerry does. Second criterion for investing… satisfied.

Lastly, I am quite satisfied to own BlackBerry shares 10 years from now, in case the stock markets shut down and there is no readily available way to trade, or even if I went on a 10 year trip around the world with no way to trade. Technology is not going away, and if anything, only keeps getting more complex. The more complex technology gets, there more vulnerabilities are discovered. As long as there are security concerns, I am comfortable investing in a company that solves that challenge for many business owners out there.

Not enough? Ok, let's keep going.

Yes, on the whole, BlackBerry as an investment has been a flat proposition over the last 3 years, and a BAD investment if you invested in the mid to late 2000's. Once the Global Recession hit, BlackBerry never recovered.

Was BlackBerry a victim of its own success? Absolutely. When BBM first came out, every teen my age had to have it. It was the next step up from 2 way pagers and it was the first taste of a device with push email. What was once a business productivity tool became the popular thing much like AOL was before it, and MySpace during and after. When the iPhone came out, it was the new must have item with the retail consumer market and BlackBerry was forgotten. Unfortunately, the company did not get the memo and kept trying to introduce new devices thinking they can maintain market share in the retail consumer market against the new trend, and forgot about the business market, the market that made them a success in the first place.

This is how the company is remembered now, as a failure in the consumer market, and those holding BBRY short will not let you forget it. What I feel they take for granted, is that BlackBerry does not need the consumer market to be relevant and profitable, the two things most important to an investor.

It is time to take the blinders off. BlackBerry is going through a turn around, and is becoming a completely different company.

One of my favorite shows on television is CNBC's The Profit with Marcus Lemonis. On the show, Marcus explains that when he invests in a business, he looks for three things; the product, the process and the people. Let's apply that to BlackBerry.

The Product

The product that BlackBerry is producing now is no longer just hardware in the form of devices. It is hardware, software and licensing. The product most people will be familiar with are the new devices, with BlackBerry's operating system OS10, first launched on the BlackBerry Z10 devices.

BB OS10 was a fantastic upgrade from the legacy OS 7. One criticism of OS10 was the lack of apps. With the introduction of OS 10.2, you could load most android apps, and they would run on your BlackBerry. This has been more or less a secret within the community. With os 10.3, this is now an advertised feature, and the phones come preloaded with both, the BlackBerry World as well as the Amazon Marketplace, allowing you to download both BlackBerry and Android applications. If the app you are looking for is not there, you can always download or side load that app and in most cases, you will be able to run it without problems.

On the device front, BlackBerry recently released two top notch phones, the top of the line BlackBerry Passport, as well as the new BlackBerry Classic. As a BlackBerry Passport owner, I am in love with the device, and it has replaced both my BlackBerry Z10, which I used for business communications, as well as my Samsung Note 2, which I used for browsing the web on a larger screen as well as for running any apps which were not available to run on the Z10. Since receiving my Passport, I have not powered on the Samsung device in over two months. The Passport, at least for me, is the one phone to rule them all. =)

Add in the new pipeline of devices, such as the leaked Rio, and the budget friendly Q5 devices; add in the sexy Porsche designed phones, and you have a device for every business market need and every budget.

On the enterprise software side you have BlackBerry Enterprise Server 12, which is being very well received. Throw in new features like BBM Protected, Secure Meetings and Messaging, think of the future offerings that will come with the acquisition of SecureSmart and you have a very complete package of business offerings.

For BlackBerry's target markets, the offerings are solid. We can throw in partnerships with Samsung, QNX integration into upcoming Ford vehicles, as well as BlackBerry's popular multi platform BBM services, and the product lineup becomes superb.

The Process

One of the areas where BlackBerry made mistakes was in their inventory management of legacy devices. In the past, a new device was over produced, not sold out, and eventually marked down. BlackBerry also shunned retailers, at least in the United States, where T-Mobile, Verizon, AT&T and Sprint got rid of BlackBerry devices in stores or altogether.

Is this getting fixed? Yes.

First and foremost, under new leadership, the last two product launches were all initially sold out. Furthermore, ongoing production is highly controlled. This should produce higher average sales prices, higher margins and less write-downs on old inventory. I feel it is better to sell fewer devices at higher margins and prices, than to sell a lot of devices at a loss.

Another fix in the process comes with the partnership with Foxconn. By letting new devices be manufactured on demand for BlackBerry, it allows BlackBerry to devote resources to their core competencies, designing devices and implementing the software. If it works for Apple, why shouldn't it for BlackBerry?

BlackBerry is also leveraging sales of unlocked devices through Amazon and ShopBlackBerry. This should further increase profit margins as it eliminates margins that would otherwise be lost through the retail distribution channel. On the retail front, BlackBerry devices will be sold once again at AT&T (Passport & Classic), as well as Verizon (Classic). This should be a stepping stone in the right direction.

On the enterprise side, BlackBerry is further continuing to monetize the BES product, with new offerings for BES 12, as well as ending the free EZ Pass program for BES 10. This should translate into more revenue. From the latest quarterly call, BlackBerry has announced some of the latest customers to the BES 12 platform. The beauty of the BES 12 platform is that BlackBerry does not have to sell it to just companies with BlackBerry devices. BES 12 can be sold to ANY company who wants to control the security on any devices, be it iPhones, Android or BlackBerry. What this ensures is that even if the company chooses not to buy and implement BlackBerry devices, they can still be sold BES12 to help run the other devices.

The People

Can I just say "John Chen" and leave it at that?

For the first time in a very long time BlackBerry as a company is right sized and has the right leadership at the top. The man responsible for multiple successful turnarounds is now performing his specialty on his biggest project to date.

In the last few quarters, he has stopped the bleeding and returned the company to cash flow profitability. The next project that he is working on is to increase revenue.

The biggest issue that critics go after BlackBerry for on is the decrease in revenue in the latest earnings repot. Yes, it was larger than what many analysts predicted, however it is not surprising, nor should be a concern, particularly at the stage of the turnaround where BlackBerry is, especially since John Chen told shareholders repeatedly to expect declines in revenue as unprofitable units are eliminated.

First rule of triage is to stop the bleeding and find the problem area, and then do you worry about the patient's headache. Why focus on increasing revenues, when that revenue does not translate into profits? Now that the fat is trimmed, the company is right sized and the product situation is more or less fixed, the focus area for John Chen, as per his own words is to focus on the revenue. John Chen is a straight shooter. There is no reason to mince his words; he will state the facts as they are.

The company needed a turnaround, and a turnaround specialist they got. If John Chen is half as successful with BlackBerry as he was with Sybase, I will be one happy shareholder, on top of being a happy customer.

In Conclusion

We discussed over the last few pages, both BlackBerry as a company and as a stock. I own BlackBerry because I feel it represents a long term value, looking out five years or more. In the short term, it may go down in value within its trading range, however over the long term(my investment horizon) I feel quite confident in the prospects as a company. Once BlackBerry proves itself as a company, the stock price will catch up to reflect it. If and when the outlook changes for the problems that BlackBerry solves, mobility, productivity and security, and the stock is fully priced, will be the day to look at selling the position.

Most of all whether you are holding BBRY long or short, you must not get complacent in your views of the company. Past performance is not necessarily indicative of future returns. BlackBerry was a great short when they insisted on staying the course when the retail consumer went a different direction. BlackBerry shorts cannot be complacent in thinking that this is the same company as it was 5 years ago.

Disclosure: The author is long BBRY.

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.