Breakout

BlackBerry Springs a Value Trap

Jeff Macke
Breakout

Shares of BlackBerry (BBRY) are getting hammered on Friday after the company reported one of the more disappointing quarters of 2013.

The pioneers of the famous “crackberry” smartphone reported a loss of 13-cents a share. Analysts had expected a profit of 6-cents a share. Revenues for the period were $3.1 billion, up 15% compared to $2.7b last quarter and $2.8b last year.

Bulls had expected this quarter to mark BlackBerry’s return to glory. In January the company held an outrageously over-the-top global launch party for the BlackBerry Z10 touchscreen model and the Q10 with the physical keyboard so beloved by zealots. The phones are the first to feature BlackBerry’s long-delayed BB10 operating system. In theory the new OS would put the company on an equal footing with Apple (AAPL), Android from Google (GOOG) and Microsoft (MSFT).

As part of the hype pop star Alicia Keys was named Creative Director and the company’s name was officially changed from Research in Motion to simply BlackBerry.

The party was a hit and the phone got relatively good reviews. The problem seems to be that the BlackBerry is fondly remembered but not desired. After years of product stagnation and disappointments from BlackBerry the world has simply moved on without them.

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Starting late and from scratch BlackBerry doesn’t have an eco-system to compete with the dominant players in the industry. As it turns out fondness for the old BlackBerry was nostalgia, not demand. Like childhood or college, crackberries are fondly remembered but no one wants to go back again.

Eric Jackson of IronFire Capital has been a vocal supporter of the company's CEO Thorsten Heins and BlackBerry stock. He was right for a long time. Suffice it to say he’s feeling burned today.

“It’s really hard to go through the results, as well as what management said on the call, and get excited,” said Jackson via email this morning. “Service revenue declines, slow BB10 uptake, no visibility from management; it’s hard to trust Thorsten after this.”The fact that BlackBerry didn’t include unit sales for BB10 devices in it’s press release didn’t help. BlackBerry conceded that shipments were 2.7 million, near the low end of the 2.5 million to 5 million analysts had expected.

After gaining more than 50% in January alone, shares of BlackBerry are now down for 2013. Though short interest in shares of BBRY amounted to 33% of the company’s total outstanding float, institutions and insiders account for 65% of the company.

Related: Wall Street Analysts Drubbed on Blackberry Calls

Suffice it to say Jackson isn’t the only institutional investor who is going to have a hard time trusting BlackBerry again after the company destroyed so many of its advocates on the last day of the quarter.

The Value Trap

The biggest lesson for investors is the danger of getting snared in a so-called “value trap.” On paper the company looks cheap with some $3.1 billion of cash on its balance sheet and a business that spins off money at a decent clip.

The problem with investing on those metrics is that BlackBerry has no intention of closing its doors and sending the cash back to investors. In this morning’s bombshell of a report Heins said the company would be “increasing our investments to support the roll-out of new products and services and to demonstrate that BlackBerry has established itself as a leading and vibrant player in the next generation of mobile computing solutions for both consumer and enterprise customers.”

BlackBerry isn’t a leading player in mobile computing. Not even close. The only thing investors can be sure of at this point is that Heins will follow through on his vow to increase his investment in an attempt to convince people the company is something it is not.

BlackBerry bulls can consider today’s losses to be akin to the price of tuition at the school of investing. A good balance sheet counts for little in a turnaround story that's on the wrong track. BlackBerry can throw money at the problem for years but they can’t change the reality of their fate.

All investors have now is a hope that Heins will see the light and put BlackBerry in play. Hope is not a viable investment thesis.

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