BlackBerry: Worst Stock of the Year

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

BlackBerry (NASDAQ: BBRY) basically came out and reported an awful quarter. The company under-performed to expectations, and as a result the share price fell by 27.8%. The under-performance is likely to continue going forward.

Earnings summary

The company’s total sales for the quarter grew by 15% year-over-year. The growth in sales was driven by improvements brought upon by its product refresh.

The BlackBerry Z10 and BlackBerry Q10 over promised and under delivered. The problem with the BlackBerry Z10 and Q10 was that even with the year-over-year sequential increase in advertising expenditures, the products themselves did not sell. The company ended up incurring an increase in its selling, marketing, and administration expense that was $150 million higher than the previous year. This was the primary contributor to the company’s lack of success, and it represented the lion's share of the $169 million operating loss that was reported for the quarter.

The company missed earnings expectation. Analysts on a consensus basis were hoping for earnings of around $0.08 per share; what actually happened was a $0.16 loss per share. The company missed earnings by a very large margin, which is what sparked the sell-off.

How bad is it at BlackBerry?

The company provided absolutely no guidance whatsoever. The CEO wasn’t very confident in providing a prediction in a market where the company has absolutely no competitive advantage. The company’s products certainly weren’t spectacular. The CEO plans to release the BlackBerry 10 in new markets going forward, but with inferior hardware specifications, the company should be busy at work developing a product that keeps up with the product refresh cycles over at Apple, Samsung, and HTC. It doesn’t take rocket science to make it in the smartphone space.

So now we’re left to speculate on the future of BlackBerry. I believe that at some point, the company will only sell smartphones in markets where it is profitable and popular. Currently 43.7% of its sales come from Europe and the Middle East. If anything, a serious restructuring of the company’s business is to emphasize profit and sacrifice more than half of its revenue. Put an emphasis on marketing in one geographic region. Then put in place a more rapid product refresh cycle and build out a stronger application ecosystem.

BlackBerry will have to become increasingly dependent on its other businesses (services and software). It isn’t in for any major turnaround anytime soon. What investors should do is sit back and wait until there’s a significant change in the overall momentum of the business.

Before I ever recommend the stock, I want the company to report growth in both sales and net income on a consistent basis. I would much rather have a consistent amount of growth, even if it is just 8%, then to have quarters where the company misses earnings, then beats earnings, then misses earnings. The company’s mobile strategy isn’t self-sustaining or sustainable yet, so investors should look for alternative investment opportunities.

Two alternatives you would want to pack on the trip

Google (NASDAQ: GOOG) will continue to grow its advertising revenue because of the increasing adoption of Internet usage across the world. Microsoft estimates that the number of Internet users will double by 2020 to 4 billion people. Google’s advertising business (Google AdSense and AdWords) will continue to grow based on the increasing number of Internet users. Going forward, investors should also anticipate an increase in the amount of revenue generated from the Android Play Store.

<img alt="" height="450" src="http://g.fool.com/editorial/images/54586/6-29-13-bbry-pic-1_large.jpg" width="734" />

Source: Statista

Digital advertising is projected to grow in the double digits for 2013 and 2014. The growth could accelerate based on an improving European economy in 2014. Going forward, investors could earn a reasonable rate of return by sticking with Google. Analysts on a consensus basis anticipate Google to grow earnings by 14.9% per year, which is a pretty reasonable rate of growth.

Amazon.com could be another compelling investment alternative. Global e-commerce sales are on the rise, and I see no reason why investors wouldn’t want to participate.

<img alt="" height="469" src="http://g.fool.com/editorial/images/54586/6-29-13-bbry-pic-2_large.jpg" width="754" />

Source: Statista

According to eMarketer, it is estimated that the business-to-consumer e-commerce market will grow by around 17% in 2013. The total buyer penetration for worldwide online e-commerce will increase to 40.4%. The growth in sales will primarily be driven by the Middle East and Africa at 31%, Asia-Pacific at 23.1%, and Latin America at 22%.

Some of the greatest limiting factors to online e-commerce are online banking and payment-technology services offered by Visa (NYSE: V) and MasterCard. Another problem is access to the Internet; by 2020 these issues will be alleviated to a certain extent as there will be 4 billion Internet users by then.

Visa recently released Visa payWave, which allow the average user the ability to buy something using their smartphone device. The great thing about it is that the emerging market will be using a larger number of smartphone devices in the immediate future, which will directly translate into more e-commerce purchases (Amazon will benefit greatly from this). Visa is projected to grow sales by 12.5% in 2013 and 11.1% in 2014. 

Going forward Amazon.com will be an effective growth investment. Analysts on a consensus basis anticipate the company to grow earnings by 37.1% per year over the next five years.

Conclusion

It would be wise to wait until BlackBerry establishes a consistent track record of earnings growth. For now, investors would do best to avoid the stock. In the meantime, both Google and Amazon seem like the best growth investment vehicles based on the underpinning economics of both businesses.

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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google, and Visa. The Motley Fool owns shares of Amazon.com and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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