Handset Maker Admits Mistakes Were Made: Stay Away
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
BlackBerry's (NASDAQ: BBRY) launch of the BlackBerry 10 was bungled from day one. At the shareholder meeting, CEO Thorsten Heins basically admitted as much, suggesting the company is a work in progress. That might be true, but is it one worth waiting around for?
Mistakes were Made
BlackBerry's first mistake, under previous management, was failing to change along with competitors in the handset market. It let Apple's (NASDAQ: AAPL) iPhone lure away customers. Then came Samsung and its Galaxy line of products. While BlackBerry has hung on to some of its business customers and die hard fans of its keyboard, most have switched to competing devices.
The company has wagered heavily on the success of the BlackBerry 10. While the phone has gotten decent reviews, the launch was riddled with self-inflicted wounds. For example, after announcing the phone, BlackBerry chose to launch it in foreign markets and not in the key U.S. market.
That choice blunted the excitement of the launch in one of the most important markets in the world. The company also waited to launch the keyboard version of the phone until after the touch screen model. Having a keyboard is one of the unique features of a BlackBerry phone; the two phones probably should have been launched together.
When the keyboard version was launched, BlackBerry chose to place a premium price tag on it. It's hard to justify an also ran product with a cost higher than that of an industry leading product like the iPhone. Mistakes were definitely made.
And then there's the company's performance. Sales have fallen from nearly $20 billion to $11 billion in just two years. Last year BlackBerry lost almost $1.25 a share. Although it earned nearly $0.20 a share in its February quarter, it lost $0.15 or so in the May quarter.
Launch costs were clearly an issue in the May quarter. With so many mistakes and an uphill market share battle to fight, however, it's unlikely that spending is going to decline. Investors should move on to other companies.
A Leader on the Cheap
Apple is probably the best value in the handset business right now. The shares have sold off notably from all-time highs and now trade hands with a price to earnings ratio of 10 or so. That's low enough to entice value investors. Add in a yield of around 2.8% and the investment merits look even better.
Apple's iPhone and iPad devices are industry leaders. Sales at the company have increased from $6 billion to $156 billion in ten years. Over that same span, earnings advanced from $0.10 a share to over $44 a share. And the company has seen year over year sales growth in each of the last four quarters, though earnings fell sequentially in the first quarter. Still, the decline in the shares seems overdone.
That said, Apple needs to either find lots of new customers or bring out a hot new gadget to keep sales and earnings growing like they have been. It's working on both and has plenty of time figure out a way to keep growing. Growth and income investors should take a look, as should value investors.
Investors looking for a tech turnaround, however, might be more interested in Microsoft (NASDAQ: MSFT). Like BlackBerry, Microsoft missed key mobile trends. It's been working on a comeback, using a partnership with Nokia to debut a new version of its Windows Mobile OS.
In addition to its new mobile OS, however, Microsoft has also launched Windows 8 and the Surface tablet. All three use a similar interface. Essentially, the tech giant has created an ecosystem for Windows users.
The upside potential for Microsoft is that handset makers have become so reliant on Google's Android that they are looking for other partners. Samsung plans to introduce its own OS, but it will be hard to build it into the industry's number three OS since competitors aren't likely to get access.
Other industry players are likely to look for an experienced partner. Windows Mobile is perfectly positioned to fill the void. And if Samsung's Tizen is a flop, it could come back to Microsoft, too.
Microsoft shares aren't as cheap as Apple's, trading with a PE of around 16 after an earnings-induced price drop. Second quarter earnings included a big write-down for weak tablet sales, which has investors worried about the company's mobile push. That said, Microsoft has plenty of time to figure mobile out so investors looking for a turnaround should look here before BlackBerry.
Avoid the Mistakes
BlackBerry is suffering under the weight of so many mistakes that investors should avoid the shares until management has proven it's back on the right track. Financially strong Microsoft should be of greater interest to those seeking a turnaround play. Apple, meanwhile, is probably the best option in the cell phone space based on its low valuation and still strong industry position.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple 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!