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BlackBerry: A Sharp Drop-Off in Units Sold in a Huge Smartphone Market

On Jan. 8, Prem Watsa (Trades, Portfolio) (Trades, Portfolio) reported adding to BlackBerry Ltd. (BBRY). So let's take a look at this company in an industry that is highly competitive and characterized by rapid changes in technologies and in customer preferences.

Sequential Decline

BlackBerry is engaged in the design, manufacture and marketing of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, the company provides platforms and solutions for seamless access to information, including email, voice, instant messaging, short message service, Internet and intranet-based applications and browsing.

The three main products segments were hardware which accounted for 40% of total revenue in the third quarter of fiscal year 2014, service revenues contributed 53% and other software, accessories and other revenues which accounted for 7%. The first two segments reported lower activity; the hardware segment was down from 78% in the preceding quarter, due to a great fall in units sold, with the majority of units being lower priced BB7 devices. The second segment dropped 13% due to a lower number of users.

Losing Market Share

From 2007 to 2010, Apple Inc. (AAPL) launched new versions of the iPhone that apart from stimulating consumer demand for smartphones, took market share from BlackBerry that it will be seriuosly difficult to recover again. Market share is well below Android´s 81% and Apple´s 12.9%. BlackBerry sold 4.3 million BlackBerry smartphones in the third quarter of fiscal 2014 (approximately 1.1 million were BlackBerry 10 devices), down 38% year over year and less than Samsung´s 81.2 million and Apple´s 33.8 million. These figures really are worrying.

Something Good? A Five-Year Agreement

BlackBerry reached an agreement with Foxconn (the world's leading developer of electronic products and components). With this deal, it will jointly develop and manufacture certain new products, reaching new markets like Indonesia and other emerging markets, and manage the inventory associated with those products. Foxconn will supply inventories for the smartphones at competitive rates, a crucial point for the company to improve margins.

Relative Valuation

In terms of valuation, it is not possible to value the stock on a P/E basis because of negative earnings. To use another metric, its price-to-sales ratio of 0.53 is below the industry average of 1.14, indicating that the stock is relatively undervalued relative to its peers.

Earnings per share (EPS) have experienced a steep decline in the most recent quarter compared to the same quarter a year ago. Also, they have demonstrated a downward trend over the past three years which is a bad signal. We include in the next graph the stock price because EPS often lead the stock price movement.

As we can see, the share price has not done very well since 2008 and in the last quarter underperformed the S&P 500.

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of weakness and is not attractive for investors.

Let´s make a comparison in the next table:

Ticker

Name

ROE

Average

-2.4

BBRY

BLACKBERRY LTD

-80

AAPL

APPLE INC

30.6

VZ

VERIZON COMMUNICATIONS INC

6.06

T

AT&T INC

8.01

CLWR

CLEARWIRE CORP-CLASS A

-93

TDS

TELEPHONE AND DATA SYSTEMS

2.59

MSI

MOTOROLA SOLUTIONS INC

33.4

CSCO

CISCO SYSTEMS INC

17.7

Blackberry´s ROE is higher than that of Clearwire (CLWR) and less than Apple, Verizon Communications Inc. (VZ), AT&T Inc. (T), Telephone and Data Systems (TDS), Motorola Solutions Inc. (MSI) and Cisco Systems Inc. (CSCO).

Final Comment

As we have seen, the fact that the stock is now selling for less than it peers, is not reason enough to justify a buy at this time. We have covered multiple weaknesses throughout the article that have contributed to miss Zacks consensus estimate in both top and bottom line.

Hedge fund managers have also been active in the company. Gurus like Irving Kahn (Trades, Portfolio) (Trades, Portfolio), John Griffin (Trades, Portfolio) (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) (Trades, Portfolio) have invested in it. On the other side, Steven Cohen (Trades, Portfolio) (Trades, Portfolio), Jim Simons (Trades, Portfolio) (Trades, Portfolio) and Andreas Halvorsen (Trades, Portfolio) (Trades, Portfolio) reduced or sold a position in the last quarter of 2013.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


Rating: 3.0/5 (10 votes)

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