More Downside Ahead for This Tech Stock

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

It took a week for BlackBerry (NASDAQ: BBRY) to plunge 34% after a poor earnings report.

The smartphone producer missed on both earnings and revenue. The earnings miss was the most painful one, as the company has scored a loss instead of profit. Investors were very disappointed, hence the pace of the decline. Was the punishment too hard and is the stock due to a rebound?

Not so fast, and here’s why.

The problem is in the business model

In its earnings call, BlackBerry has stated that it’s not going to be all things for all people in all markets. The numbers from the earnings report suggest they mean what they say, with the number of subscribers down 5% to 72 million.

BlackBerry tries to assure its position as a provider of business solutions to enterprises, but that does not work so well. The number one problem is that world does not end with Fortune 500 companies. There is a huge number of small and mid-sized businesses all over the world. Would they buy smartphones for their employees? Probably not. Instead, they would use the “bring your own device” policy, which is especially popular in emerging markets.

What are the chances that this device would be a BlackBerry? Chances are, it would not. The company has announced its plans to bring the BlackBerry Messenger service free to iOS and Android, responding to the users’ desire to be able to connect to all their friends and family. This is an admission that users prefer other devices when not at work.

The competition is huge

Blackberry limits its opportunities to grow on a highly competitive market. The latest data shows that the world is dominated by Android devices, which have a 75% global share. Apple’s (NASDAQ: AAPL) iPhone has a 17.3% share, while advices run on Windows Phone have 3.2% share.

The latest dynamics have been favorable for both Android and Windows Phone. Microsoft and Nokia (NYSE: NOK) continue to make slow progress. Adding to the hype are constant rumors that Microsoft could be buying Nokia, but these stories remain in the rumor field. It’s Nokia who is shopping right now, buying Siemens’ 50% stake in Nokia Siemens for $2.21 billion. In response to the deal, S&P 500 has cut Nokia’s debt rating to B+ from BB-, stating that the move endangers Nokia’s cash position. However, the market reacted positively on the news, as the move would strengthen the company’s position on the mobile phone market.

In the meantime, Apple is struggling to get some wind into the sails of its ship. The gap between Apple’s U.S. share, which currently stands at 41.9%, and the company’s  share in the five central countries of the EU (EU5), which is 17.8%, continues to widen. Apple faces competition not only from Android-based devices from established vendors, but also from emerging Chinese manufacturers who produce cheap Android phones. As the smartphone customer base widens, companies dig into the area of more price-sensitive clients. This would limit Apple’s growth in this field until the company presents a so-called cheap iPhone. A lot of rumor is going on regarding this topic, but it’s better to wait and see the exact device and price tag before making conclusions.

And here comes another area of BlackBerry’s weakness. The company, which was always supposed to perform well in emerging markets, does not offer price-attractive devices. In addition to that, BlackBerry's lack customer awareness. The company has increased its marketing spend, but that has not worked as it was supposed.

Bottom line

You can expect more downside from BlackBerry. The company has limited customer base and does practically nothing to enlarge it. Its devices face tough competition from various vendors, and seem to lose it on both marketing and pricing fronts. The company has stated that it expects loss in the next quarter, which does not add enthusiasm about the stock’s prospects.

Apple could be trying something new to provide growth for its investors. The stock is down 20% this year. The valuations get more attractive as the stock is going lower. However, investors seem to favor growth over valuation when it comes to tech stock, and Apple struggles to provide the next big thing. Nokia’s position looks best from the growth perspective. The company’s market share is small, but it has managed to finally gain some share with its Lumia models. The stock is up only 3% this year, but I think it could perform better. 

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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