BlackBerry: Earnings Were Dim, But the Story's Not Over

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

The past 12 months were amazing for BlackBerry (NASDAQ: BBRY). Until about a week ago, the stock price was up 62% thanks to the street's high expectations on BlackBerry 10 (BB7) services, BlackBerry's latest attempt to recover market share and become a leading player in the smartphone space. But high expectations need real revenue to survive. And eventually the time for investors to demand some real sales to keep their long positions had to come, just like all things in life. The D-Day: Friday, June 28, 2013. After BlackBerry reported disappointing first-quarter results in the morning  (revenue of $3.1 billion, quite below estimates; and a pessimistic outlook and loss projection for the second quarter), it all went wrong: down 27.76% in a single day.

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BlackBerry bulls were particularly hurt by the disappointing sales of BB10 devices: 2.7 million units. This number includes sales of BlackBerry Z10, which is the flagship of all the BB10 series and is considered by many as the last hope for BlackBerry to become an important player in the fiercely competitive smartphone market. But 2.7 million units sold was just too low. Goldman Sachs was projecting 3.5 million units. Wells Fargo, too. Societe Generale went as far as projecting 5 million units and Jefferies, around 4 million units. 

Notice, however, that a -27% hit on stock price has caused BlackBerry's market capitalization to go as low as $5.5 billion dollars. You have to agree with me that, although BlackBerry is definitely having serious issues competing against major giants in the smartphone market, $5.5 billion dollars looks, at first glance, like a very cheap valuation. 

Is it time to be a bull or a bear?

First, we need to know how serious the situation is. The company confirmed that it is having problems with profitability and competitors. EPS came negative. Adjusted loss from continuing operations for the first quarter was $67 million ($0.13 per share). The outlook for the next quarter is uncertain and pessimistic: "The smartphone market remains highly competitive, making it difficult to estimate units, revenue and levels of profitability." And, even worse, the company missed on revenue estimates by a big margin, which means that the Z10 did not help much, at least until now.

Before the earnings call, 182.6 million shares were shorted, but many refused to become bears simply because most sell-side analysts kept their buy or overweight ratings. To make things more confusing, StatCounter statistics (which measures Internet traffic, including traffic coming from BlackBerry devices) gave a hint that BlackBerry could beat the street consensus. It showed an increase in Internet traffic coming from BlackBerry devices:

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However, even though BlackBerry devices seem to be increasing in number (as measured by percentage traffic coming from mobile devices), now we can be sure that it will take more time for BlackBerry to sell enough devices to break the buck and beat the street consensus. Luckily for BlackBerry, even though sales are not enough now to make a real difference in the stock price, the graphic shows a healthy growth trend that could make a real difference in a couple of quarters.

The trend is exactly the opposite for traffic coming from Apple's (NASDAQ: AAPL)(NASDAQ: AAPL): Fewer Apple devices are being used to access the Internet, which is consistent with the poor performance Apple showed in its latest earnings call. Now, Apple's traffic seems to be decreasing faster than BlackBerry's traffic is increasing, but there is an obvious explanation for this. Samsung's (NASDAQOTH: SSNLF) traffic is also rising – among other competitors –  which confirms the fact that the Korean hardware maker remains well-positioned in Asian emerging markets, where the smartphone penetration ratio is increasing like there is no tomorrow. 

The graphic above could show the beginning of BlackBerry's recovery. But this process will definitely take more than a handful of months to happen. The revenue figures that BlackBerry showed last Friday confirm what traffic data showed: Revenue is increasing. It came in at $3.1 billion but it still represents a 15% increase from the previous quarter. If you assume that BlackBerry will continue increasing its revenue at the same growth rate for the next three quarters, the company will have no problem in doing $14 billion in sales this year.

Considering that the current market capitalization is only $5.5 billion, this means that BlackBerry is trading at a 0.3 times multiple on potential revenue, an extremely cheap valuation. Consider that according to Morningstar, Apple's price-to-sales ratio is 2.2. Samsung also has issues: its market share, estimated at 29%, is already too high to assume the current growth rate will be sustainable in the long run. BlackBerry, on the other hand, has a good product and a market share percentage too low to assume no growth will happen.

This suggests that after Friday, the stock has become much more attractive. Under a one-year investment horizon, the chances are high that Blackberry will see a price increase. But let's be clear: Even though the market may have overreacted this Friday, nobody should expect a correction in the next days. In the short run, BlackBerry will show extremely high volatility, because nobody knows what to make out of the poor forecast the company announced this Friday. The upside is that expectations now are much lower for the next quarter. 

The bottom line

BlackBerry's crucial mistake was underestimating the smartphone market six years ago. As a result, its share price has steadily declined in the past five years, as Apple and Samsung (early movers) have surpassed it in the smartphone market. The BlackBerry 10 symbolizes the most aggressive move of BlackBerry in order to recover market share and try to fix an old mistake.

For many, this seems just a desperate (perhaps final) move, as the smartphone industry is fiercely competitive. After all, Apple has its own payments ecosystem and Samsung sells extremely well in emerging markets, while BlackBerry seems to have no strong competitive advantage in the smartphone arena so far. That being said, the BlackBerry 10 is a good product in terms of software and hardware, and could become a strong competitor in the middle run.

The figures showed on the last earnings call made it clear that although the BlackBerry 10 is helping to increase revenue growth (up 15%), it will take more time for it to make some real impact on the revenue base – changes that can make the stock price go up. For those who are risk-averse, it may be better to watch this stock from the sidelines. But if you don't mind the risk, buying a company that is trading at one-third of potential revenue for this year sounds attractive, specially for those who are patient enough to wait a couple of quarters.

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