Blackberry Stock is Down, but Its New Strategy is Bullish
BlackBerry Ltd (NASDAQ:BBRY) is back to its recent antics. It seemed as if Blackberry stock had crossed a line. A little over two weeks ago, Blackberry announced that it would let go of the mobile handset game. The market is split between “Android” and Apple Inc.’s (NASDAQ:AAPL) “iOS” system, leaving the Canadian company, once the darling of celebrities like Kim Kardashian, only a laughable slice of the market.
Blackberry stock was looking at a big drop. Instead, it could hit anywhere from $8.50 to over $10.00. (Source: “What is Recommendation from Analysts on BlackBerry Ltd (NASDAQ:BBRY)?,” Post Registrar, September 30, 2016.)
Blackberry took note and decided to revolutionize its whole business. Once known for smartphones featuring an actual keyboard with physical buttons for ease of typing, Blackberry announced that it would make smartphones no more.
Blackberry Stock Responded Enthusiastically
BBRY stock shot from around $7.20 to $8.33 on the news. The evident logic was that Blackberry, no longer a phone maker, would save on manufacturing and development costs, shifting the bulk of its activities and profits to software and security services.
Now BBRY stock is back down where it started last month. It’s back in the mid-$7.00/share territory. Perhaps investors feel that Blackberry may have acted in haste. They see the fact that the company has ceased making phones as a missed chance to capture the market share left dissatisfied by the Samsung Electronics Co Ltd “Galaxy Note 7” debacle. Should that be the case, Samsung may have pulled its Galaxy Note 7 off the market, but the company will be back and stronger than ever. So any benefit to BBRY stock would have been fleeting, at best.
No, the way to push value higher for Blackberry stock shareholders is to focus on where the company has had little competition to begin with: software and services.
In its latest earnings release, Blackberry revealed that its revenue from software and services more than doubled year-over-year. Its famous messaging service was so popular that it’s now offered as a revenue-generating subscription-based item. (Source: “Blackberry Does the Right Thing By Pulling the Plug on Handset development,” Forbes, September 30, 2016.)
The Internet of Things (IoT) will also boost Blackberry stock’s course; it can help its over-3,000 enterprise customers advance in this area, generating much higher margins than in the merciless smartphone market. (Source: Ibid.)
Even for the big players in the market, it’s only at the premium level that companies like Apple or Samsung generate profits. No wonder they are making ever more powerful (and more expensive) devices. But Blackberry understands that the market is made of people, who tend to be creatures of habit. Indeed, Blackberry hasn’t left phone handsets altogether; it will simply be making and selling them in a more efficient way. Efficiency is a good thing for shareholder value.
Blackberry will still manage to add revenue from handsets, but rather than designing them in-house, it will rely on third parties to design and manufacture them. The company has already announced to whom and where this shift will be. It has contracted a mobile telecommunications company in Indonesia, BB Merah Putih, to make its devices as part of a joint venture.
BBRY Will Still Play a Hand in Handsets
It has been three long years in which Blackberry stock has tried to move up. But it has faced an uphill battle. It turns out that the full-on handset business was acting as a ball-and-chain on earnings and growth, putting pressure on BBRY stock.
In that period, however, not everything was wasted. This was what it took to achieve an unusually smooth transition away from what had been its core business. Think of Blackberry’s value now as coming mainly from providing software and services to businesses and governments.
Yet Blackberry will still maintain a presence, and a competitive one. Its third-party Android phone, “Mercury,” might even keep some trademark BBRY characteristics, including a full physical keyboard with a shape reminiscent of the “Bold,” but it will cost less to make. (Source: “Upcoming BlackBerry Mercury with physical keyboard possibly spotted in a benchmark,” GSMArena, October 17, 2016.)
When you consider that BlackBerry had a gleaming 0.1% share of the smartphone market in 2015, it’s a wonder that BBRY stock is still trading. Not only that; BBRY stock has all the cards it needs to thrive. The company has come full circle and has discovered its niche, deciding to exploit it at the expense of the company’s original core business. That kind of audacity brings rewards.