Is it Time to Call BlackBerry’s Bluff?

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On June 19, 2008, shares of Research in Motion stock established an all-time high at $147.55. At the apex of its powers, BlackBerry (NASDAQ:BBRY) controlled half of the smartphone market, and Wall Street traders then also applied an $82.6 billion market capitalization price tag on the corporation. A highly circulated 2008 photograph of presidential candidate Barack Obama and his trusted BlackBerry handset captured the essence of this nascent smartphone movement. BlackBerry was once the preferred domain of political officials, corporate bosses, and IT professionals, who gravitated toward the brand for its functional engineering and ironclad security features.

In more recent times, BlackBerry’s spat against carrier T-Mobile (NYSE:TMUS) has captured just how far the mighty have fallen. BlackBerry has arrived at its own Waterloo after failing to serve consumer demand. Prospective investors should avoid BlackBerry shares. Going forward, BlackBerry will remain all but irrelevant when juxtaposed against the dominant iOS-Android mobile duopoly.

Great offer for BlackBerry customers

In February, T-Mobile targeted its BlackBerry customers with a special offer to exchange their old handsets for the Apple (NASDAQ:AAPL) iPhone 5S. T-Mobile pitched the exchange as an “upgrade” while also praising Apple for its “powerful communications” and “productivity apps.” The T-Mobile deal granted its BlackBerry customers rights to purchase the iPhone 5S with no annual service contract through the no-money-down Simple Choice Plan. BlackBerry customers who made the move toward the iPhone 5S could pay off their new handsets in 24 separate installments at $25 per month.

In a terse February 18 letter, BlackBerry CEO John Chen attempted to take T-Mobile to task. According to Chen, T-Mobile made no effort to deliberate with BlackBerry brass in regards to the aforementioned iPhone offer. Chen was then assured that the “outraged” BlackBerry camp would send a “powerful message” to T-Mobile. Chen went on to rip T-Mobile for its “clearly inappropriate and ill-conceived marketing promotion.”

In response, T-Mobile was to promptly offer BlackBerry customers $200 in rebates if they agreed to exchange their old handsets for Samsung smartphones. BlackBerry, of course, was forced to allow its T-Mobile licensing contract to expire on April 25. The recent events confirmed that BlackBerry has lost all real power within the mobile space.

On May 2, research firm comScore released its March 2014 U.S. Smartphone Subscriber Market Share report. Be advised that the title of the report is somewhat misleading, as it actually presented averages of data taken from the first calendar quarter of 2014. According to the recent comScore report, Google (NASDAQ:GOOG) Android (52.2 percent market share) and Apple iOS (41.4 percent market share) systems combined to operate 93.6 percent of U.S. smartphone subscriber handsets through first-quarter 2014.

Alternatively, BlackBerry has been desperate to stay relevant with a mere 2.7 percent share of this market. BlackBerry did lose 70 basis points in market share through first-quarter 2014. Going forward, the loss of T-Mobile business may further decimate whatever has been left of the BlackBerry empire at Waterloo.

The bottom line

BlackBerry stock closed out the May 16 trading session at $7.25 per share. At these levels, traders have applied a $3.8 billion market capitalization price tag to the BlackBerry business. In six short years, BlackBerry managers have destroyed $80 billion in shareholder value after haughtily dismissing the Apple ecosystem, naming and firing R&B singer Alicia Keys as global creative director, and ultimately terminating a longstanding licensing agreement with T-Mobile.

Going forward, Chen’s plans to reorganize business units and sell off real estate will not grow real returns for shareholders. Financial engineering will do little to attack and defeat the 800-pound gorilla in the room: that consumers do not care for BlackBerry products.

Be further advised that Fairfax Financial and its consortium of institutional investors also own $1.25 billion in BlackBerry convertible bonds. These convertible bonds grant rights to exchange principal for BlackBerry stock at $10 per share. Full conversion of these convertible bonds would add 125 million shares of stock to a balance sheet now carrying a mere 526.6 million shares outstanding. BlackBerry shareholders are therefore exposed to the risk of 23.7percent ownership dilution. The convertible bondholders, of course, would maintain asset rights above those of shareholders in the event of bankruptcy.

BlackBerry reported a staggering $5.9 billion in losses off $6.8 billion in revenue for its fiscal 2014 year ended March 1. BlackBerry would have actually racked up $7.2 billion in net losses without making full use of $1.3 billion in tax credits. At this point, the aforementioned $1.25 billion in convertible bonds may be keeping BlackBerry out of bankruptcy court. BlackBerry, however, cannot float the note in perpetuity. As such, conservative investors should follow T-Mobile’s lead and avoid BlackBerry stock altogether.

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