This Stock Proves Why You Should Never Buy on a Whim

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

Just a couple of days before BlackBerry (NASDAQ: BBRY) announced results for its first Fiscal Quarter (FQ1) of 2014, sell-side analysts indicated  the company could beat analyst estimates. Analysts from Morgan Stanley said that they expected the company to at least meat analyst estimates. The analysts also raised their expectations on shipments for the BB10.

Nonetheless, we all know what happened; BlackBerry missed analyst estimates and is now trading at its lowest price this year, $10.29 per share. On July 1, the stock even traded for as low as $9.96 compared to a high of $15.09 reported on June 27.

BlackBerry is involved in a battle with the likes of Apple (NASDAQ: AAPL) and Samsung Electronics (NASDAQOTH: SSNLF) increasing their market share in smartphone sales. In terms of smartphone platforms, BlackBerry is also struggling against Apple’s iOS, and Google’s (NASDAQ: GOOG) Android. According to recent statistics from IDC, Microsoft’s (NASDAQ: MSFT) Windows Phone has already overtaken BlackBerry in terms of market share.

Those who bought a day before BBRY FQ1, 2014 results were just speculating

I fail to understand why an investor would rush to buy a stock following an upgrade by analysts, or simply some optimistic outlook. The wise do their research, and if need be, sell as witnessed just a day before BlackBerry announced its FQ1 2014 results. Did anyone really expect BlackBerry to do any better? The only reason BlackBerry posted profits in FQ4, 2013 was because of the new products it launched in January. There is always a good anticipation from the market when a company launches new products, but that momentum does die gradually.

Another factor that contributed to BlackBerry’s rebound in FQ4, 2013 results, is because when it launched BB10, Samsung and Apple had launched their latest editions of smartphones months earlier. Nokia on the other hand, had begun retailing its latest Windows Phone, the Lumia 920 in December. This meant that competition for BB10 was quite low.

Following the announcement of the results and the stock’s decline, analysts now value BlackBerry at as little as $8 per share. So what changed fundamentally? Nothing at all changed. Only that the company missed estimates and  tanked. In reality, BlackBerry’s outlook remains weak with its only hope in the smartphone industry resting on the BlackBerry Q10.

The BlackBerry Z10 is facing a tough battle from the likes of iPhone 5, and Samsung Galaxy S3 and S4. The BlackBerry 10 OS is a powerful software, but came a little too late when iOS and Android had already established themselves as the top two in the market. It will be even difficult to dislodge Microsoft’s Windows Phone from the third position in terms of market share going forward.

The company also introduced Secure Work Space, which prevents malware moving from personal to corporate files. The fact that  the service allows Android and iOS users to toggle between corporate and personal mode, which means a wider addressable market, presents the biggest opportunity here. Nonetheless, this is likely to be insignificant to overall revenue model, as hardware accounted for more than 70% of revenues in the most recent quarter.

Competition

Google's smartphone business involves both the sales of devices and ad revenue from the open source Android platform. Android is the market leader in terms of device sales, accounting for about 70%, while the smartphone devices, which Google sells via its fully owned subsidiary, Motorola Mobility, trails Apple's iPhones and Samsung's Galaxy S phones.

Apple on the other hand, comes second in both metrics, with its iOS trailing Google's Android and Samsung Galaxy S phones globally. However, the company is also very actively involved in the sale of PCs, and recently refreshed both the iOS and OS X platforms. Apple also introduced a new iMac during its most recent WWDC event.

Microsoft's bet on smartphones is based upon the performance of Nokia Lumia phones, which use Windows Phone O.S. However, the company also entered the tablets industry last year, when it launched the Surface RT tablets to compete against Apple's iPads and Google's Nexus tablets. Microsoft's main business is software, and unlike Apple, does not manufacture its own PCs. 

The three companies have very diversified portfolios, which give them a hedge over the likes of BlackBerry and Nokia in the smartphones industry. Google has already won the smartphone platform battle, while Apple seems settled for second, with Microsoft holding on for third. 

Performance and valuation

BlackBerry has a gross margin of 33%, which makes it an underdog compared to Google’s 58% and Apple’s 40%. However, the company trumps Nokia’s 29% gross margin. Nonetheless, BlackBerry’s operating loss margin of 5% is the worst in the group, as Nokia’s loss stands at just 1% close to break-even. Apple is the best among the four companies with an operating margin of 31%, while Google’s stands at 25%. South Korean electronics giant Samsung on the other hand has an operating margin of 15.4%.

BlackBerry’s most recent quarter revenue grew by 9.1%, thank to a strategic launch date for its BB10 phones, but this was still below Apple’s 11.3% and Google’s 31.2%. On the other hand, Nokia’s most recent quarter revenue declined by 20.4%, while Samsung’s grew by 16.8% year-over-year.

BlackBerry’s Price to Sales ratio (P/S) of 0.48 times compared to Apple’s 2.27 and Google’s 5.51 may seem like an undervaluation. However, this could be a calamitous value trap. The low P/S ratio is indicative of the company’s bleak outlook, and this is backed by Nokia's P/S ratio of 0.39 times. Both BlackBerry and Nokia continue to struggle in the smartphones market, hence their low P/S ratios.

The bottom line

There is no question about the future of the smart devices industry. It is promising. However, for the laggards like BlackBerry and Nokia, the battle is bound to prove too hot to handle. BlackBerry’s future in the smartphone market is even dimmer than before, considering the fact that Windows Phone platform has already eclipsed the BB10 platform in terms of market share.

If we were to extrapolate that trend, then the outcome for Blackberry could be nothing, but disappointing. If you are seeking value, then don’t bet on analyst upgrades and downgrades, not unless you are a speculator.

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Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. 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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