3 Mistaken Reasons to Buy BlackBerry

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

Following BlackBerry's (NASDAQ: BBRY) disappointing financial results, the bulls have been forced to revamp their thesis. Unfortunately, some of their newest arguments don't entirely pass the smell test. Here are the top three mistaken reasons to buy BlackBerry.

The big cash pile

Bulls regularly point out BlackBerry's big cash balance and strong free cash flow. And at first glance, a lot of their points make sense.

First - BlackBerry is sitting on $3.1 billion in cash and investments. Given the company's $4.8 billion market capitalization, cash could represent some kind of a floor underneath the share price.

Second - BlackBerry has posted impressive cash flow numbers. During the first quarter, the company generated nearly $600 million in free cash flow suggesting to many that the underlying business is sound.

But BlackBerry's cash position isn't nearly as strong as its financial statements would lead you to believe.

First of all, one-time gains mask BlackBerry's cash burn. Much of the company's gain was due to a one-off tax receivable benefit. Excluding this, BlackBerry actually burned through $350 million during the first quarter.

In addition BlackBerry has bolstered its cash position by delaying payments to suppliers. In the past two quarters, the company's accounts payable has doubled to $1.2 billion. That's not sustainable. Expect the company's cash balance to fall considerably in upcoming quarters.

The service business

Some bulls think BlackBerry will quit the hardware business and move completely into services. But while the company is taking steps in this direction, these bets are speculative at best.

ACI Research analyst Ed Zabitsky thinks BlackBerry could become a social network when it releases its BBM messaging service to Android and iOS later this summer.

But as Fool contributor Evan Niu points out, a social network-like service is a long shot. First, it's unclear how a free service could be at the heart of the company's turnaround. With only 72 million subscribers (though that figure will likely grow significantly after release), the advertising potential for BBM Messenger is small when you consider the hundreds of millions of members that use rival services like Twitter and Facebook.

How much value should investors really assign to a risky social network start-up?

Other analysts think BlackBerry could reemerge an enterprise device management company. In June the company rolled out Secured Work Space. This is a new service that allow businesses to manage multiple platforms (Android and iOS) in the workplace.

The problem with this theory is that according to Gartner, the entire device management business is only a $500 million industry with lots of competitors and tight margins. BlackBerry would need to corner the industry and expand it by a factor of eight just to replace its current service revenues.

But there is one hole in my thesis here: the company's QNX operating system. The possibilities for the platform seem limitless.

Vehicles are one such outlet. Communicating and controlling our vehicle systems with mobile devices represents the future of the automotive industry. Imagine the ability to customize your dashboard, and the chance to use of 3rd party apps, or your car sending you a diagnostic before a scheduled repair. That's all possible on the QNX platform.

And BlackBerry is making good on its promise to expand in this area. In June, the company unveiled QNX on the Bentley Continental and the Jeep Wrangler. Today there are already more than 30 million vehicles already the running on QNX software. 

And QNX's future isn't just limited to car infotainment systems. The operating system is already used in nuclear reactors, medical devices, parking meters, and credit card machines. Basically QNX is your go-to choice wherever the cost of failure is high. If BlackBerry has a future outside of smartphones, this is it. 

The break-up play

With its share price declining, many analysts think BlackBerry is worth more dead than alive. Could the company be broken up and sold for a hefty premium? To be fair, I have been an advocate of this idea previously. But recent developments have caused me to question that theory. 

First - consider the value of the company's patents. Two years ago, analysts estimated the value of this portfolio could be worth between $3 billion to $5 billion. But it's unlikely BlackBerry could fetch anywhere near that today as the value of patents have fallen considerably.

Second - can anyone name a potential buyer? Last year, BlackBerry shares traded down to $6 yet no one stepped in to pick up the company. Given recent developments, a buyout is even more unlikely.

IBM was previously rumored to be interested in purchasing BlackBerry's service business. But after the operation bled four million subscribers last quarter (and those losses are accelerating), IBM has probably lost interest.

Could Microsoft (NASDAQ: MSFT) buy BlackBerry?

While an acquisition would support Mr. Softy's push into the mobile space, Microsoft is much more likely to acquire Nokia (NYSE: NOK) due to the companies existing partnership. If a deal is struck the software giant could gain access to Nokia's distribution channels, hardware expertise, mobile patents, and manufacturing facilities. This could allow Microsoft to create a new superpower in the smartphone space.

Earlier this year the Wall Street Journal reported both companies were in acquisition talks, but the deal fell through due to Nokia's weak position in the marketplace. However, strong sales of the Lumia 920 handset may bring Microsoft back to the bargaining table and represent a big upside catalyst for Nokia shares.

Foolish bottom line

So here's the BlackBerry bull thesis - BB10 isn't dead yet. The Q10 handset has just been released in the United States and we can't declare the launch a failure until we see those results. Right now the stock is priced for total collapse.

I'll concede that point.

Robert Baillieul has no position in any stocks mentioned. The Motley Fool owns shares of 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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