BlackBerry: The Venice Launch Will Be A Positive Catalyst

About: BlackBerry Ltd. (BB)
by: Insider Monkey
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BlackBerry's Venice phone could be a hit because it offers better security features than other Android phones.

Given its book value of $6.64 a share, BlackBerry stock has limited downside.

If Venice sales are strong, BlackBerry shares will rally closer to $10.

By Jay Smith

Images of BlackBerry's (BBRY) new Android phone Venice recently leaked onto the net. The images show a superbly built smartphone that combines BlackBerry's easy to type keyboard with Android's millions of apps. If launched, Venice will be BlackBerry's first Android phone in the company's history.

Expectations for Venice are not great. Investors don't expect Venice to be BlackBerry's savior like they expected Q10 to be. In Q10's case, BlackBerry stock rallied prior to the launch, going from $7 a share in October 2012 to $15 a share in March 2013 on the anticipation of strong Q10 sales. In Venice's case, BlackBerry stock hasn't rallied much beyond its 52 week lows even though investors expect BlackBerry to launch Venice in November.

Given the low expectations, the risk reward for buying BlackBerry is good. Because the market views BlackBerry's bread and butter as software services rather than hardware, BlackBerry's stock won't fall much if Venice fails. Because investors have low expectations, strong Venice sales could be the catalyst that sends BlackBerry shares closer to $10 a share.

At its current price of $7.15, BlackBerry's downside is limited. BlackBerry has a book value of $6.64 per share and $5.67 of cash per share on its balance sheet. Given Blackberry's patent trove, BlackBerry's book value will jump if the company sells its patent portfolio to an emerging smartphone company such as Xiaomi, which doesn't sell in the U.S. or Europe because it lacks a patent collection.

BlackBerry's upside is substantial. Venice sales could outperform as the phone will presumably have better security than other Android phones. Venice could also do well by attracting former BlackBerry users who no longer use BlackBerry because its phones don't have as many apps as Android phones have. All it takes is one hit phone and BlackBerry EPS will increase.

CEO John Chen has done a good job. Although BlackBerry's stock price hasn't done much since John Chen first became CEO, BlackBerry is fundamentally a much better company. BlackBerry is cash flow positive and expects to be non-GAAP profitable sometime in Fiscal 2016. BlackBerry is realizing more revenue from software and messaging services, which is more durable and higher margin than hardware. BlackBerry is still a take-over candidate, with potential suitors including Samsung and Amazon.

Many hedge funds own BlackBerry. According to SEC filings, Prem Watsa's Fairfax Financial Holdings is the largest shareholder of BlackBerry, with 46,699,700 shares as of June 30 2015. BlackBerry accounts for 27.97% of Watsa's equity portfolio. Jim Simons' Renaissance Technologies is in second place, with 5,986,943 shares at the end of the second quarter. Renaissance Technologies upped its position by 62% from April 1 to June 30. Peter Rathjens' Arrowstreet Capital is in third place, with 4,749,158 shares. Arrowstreet Capital was the only top 10 hedge fund holder who decreased its equity holdings of BlackBerry in the second quarter. The other top 10 equity hedge fund holders, including AQR Capital Management, Kahn Brothers, D.E. Shaw, Gotham Asset Management, and Citadel Investment Group, all added to their bullish positions or kept their positions the same.

We mention the hedge fund owners of BlackBerry because following hedge funds can generate alpha. Our research shows that the 15 most popular small-cap stocks among hedge funds have outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward-testing the performance of these stock picks since the end of August 2012, and they managed to return more than 131% over the ensuing 2.5+ years and outperformed the S&P 500 Index by over 73 percentage points.

Disclosure: I/we 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.