BlackBerry Stock Has Everything to Gain from New Direction
BlackBerry Ltd (NASDAQ:BBRY) has taken up the market’s advice. In a bold move two days ago, the company announced it would stop making its own phones.
BlackBerry stock promptly gained 6.5% (as Profit Confidential had predicted in an earnings preview) because of the change. The company said that instead of handsets, it would focus its energy and resources on developing software for “Android” devices in general.
BlackBerry stock, as a result of its momentous strategy shift, could be one of the best listings to watch in 2016 and 2017. BlackBerry should start to see the fruits of its new strategy already in the next few quarters. Indeed, some Wall Street firms, Raymond James Financial, Inc. (NYSE:RJF) for one, predict that BlackBerry shares are set to outperform.
The very fact that BlackBerry will no longer have to invest millions to design and manufacture devices will significantly lower capital requirements. But, unlike short-term visionless and Band-Aid solutions to boosting share prices—for a few weeks—BBRY stock can look forward to a sustained path to growth. Still, BlackBerry isn’t simply walking away from phones altogether.
BlackBerry Made the Most-Coveted Phones, But No More
BlackBerry hasn’t forgotten that, not long ago, it led the smartphone market. Its new strategy will see the subcontracting of phones to Indonesian company Tiphone Mobile Indonesia Tbk PT (IDX:TELE), in a joint venture known as PT BB Merah Putih, which will manufacture BlackBerry devices in Indonesia. BlackBerry will focus on developing the more profitable software. (Source: “BlackBerry announces device software licensing agreement with joint venture PT BB Merah Putih,” CrackBerry, September 28, 2016.)
Competition with the likes of Android phones, which now account for over 50% of the market, as well as “iOS” devices like the “iPhones,” was draining resources at BlackBerry. The phones appealed to a specific market, and adopting more mainstream solutions put the BlackBerry up against an ever-growing number of competitors worldwide, especially in Asia.
BlackBerry’s decision is wise, and management should have gone in that direction a long time ago. But CEO John Chen had little time to make the big changes. This is certainly one of the company’s most significant moments. Revenues from hardware had started to drop noticeably three years ago. BBRY stock, which sold for $230.00 per share in 2007, never recovered.
BBRY Stock Suffered from Delay in Cutting Off Phone Division
There were some bullish hints in 2013, when BBRY shares traded in the $17.00 range—briefly—only to drop to below $10.00 in 2015, never managing to recover. But, now BBRY has the tools to do just that. The numbers don’t lie. While hardware revenue continued to sink, sales of software and services (where margins are higher) reached $156.00 million for the recent quarter. Compare that to the $105.0 million from hardware.
It’s the end of an era. BlackBerry shares have gained, hinting that investors believe the company is moving in the right direction now, but it’s difficult to absorb the news. Indeed, BBRY might need a few days or weeks for investors and the public to absorb the fact that BlackBerry, which beat the likes of the iPhone for hype not long ago, will no longer make phones.
World leaders such as President Nicolas Sarkozy or President Barack Obama were among the most famous users of BlackBerry phones, contributing to their image as the prototype for modern cool. Hollywood also contributed to boosting the BlackBerry image, or even lifestyle. In the TV show “Gossip Girl,” major characters featured their BlackBerry phones prominently. Kim Kardashian was another BlackBerry “ambassador.”
But the numbers spoke clearly. If in 2009 BlackBerry owned 20% of the mobile market, by 2016 that percentage had dropped to 0.1%. How do you recover from losses like that? Under the circumstances, the best move for BBRY stock was to stop making phones. It’s better for the company to concede having lost to Android than to continue trying to beat it, dragging investors down with it.
BlackBerry will now concentrate on areas where it leads even competitors like Samsung: software and security. There is a reason that world leaders and tabloid stars liked BlackBerry devices after all. That said, a leaner and more focused BlackBerry will be good for investors, and the next quarter could already show favorable results.