A lot of people got rich trading Research In Motion Ltd (NASDAQ:BBRY) during the past few months. Since bottoming above $6 in late 2012, the stock has multiplied to just under 18. But now the price trades near $13.
I certainly applaud the savvy traders able to exploit a beaten-down security. But the excess share price growth is not tied to reality.
To be fair, BlackBerry does have three major upsides. First, the company has no debt and a lot of cash – $2.73 billion as of December 1 – meaning that it has time to stay in the game. For losing companies, cash is KING.
These positives mean that BlackBerry has new technology and time to test it out. So the building has not burned down – but it is time to yell “Fire!” because BlackBerry is losing its core business. Here’s why.
1. Losing Out on Big Business
According to a recent Wall Street Journal story:
“About three years ago, some 2,500 employees at Land O’ Lakes Inc. used company-issued BlackBerrys. Today, the number at the Minnesota butter maker is down to 12. Despite this week’s launch of a new BlackBerry, Barry Libenson, the Company’s chief information officer, said he is no longer planning on supporting BlackBerrys.”
Why? The “vast majority” of employees prefer different phones, he says, and he is concerned with BlackBerry’s financial position (read: losses).
The fears are legitimate. Before Apple Inc. (NASDAQ:AAPL) unveiled the iPhone in 2007, RIM’s client base was 71% comprised of corporations. Now that number is estimated to be between 20% and 25%. Moreover, a Forrester Research study polled 1,600 IT decision makers at firms in North America and Europe. The results show that 54% of them use a BYOD, Bring Your Own Device, program, cutting out BlackBerry as the de-facto device.
Also, don’t forget that large companies typically move slowly. Thus many may not be able to support RIM’s new operating system until March or even until the second quarter, meaning that phone sales would be delayed.
2. Tumbling Market Share
For a firm that once held a firm grip on smart phones, BlackBerry has fallen a long way. Granted, the market has grown exponentially and competition has picked up, making it hard to keep such high market share. But currently the company has just a 4.6% share of the market.
To make up the difference in market share, BlackBerry will need to pick up new individual users, as opposed to businesses. The downside is that monthly service fees are estimated at $1-4 per user for individuals versus $7-10 per user for corporations.
That’s a lot of profit ground to make up.
Throw in the fact that BlackBerry is offering a “tiered” menu system (meaning that some of its service revenues will likely be trimmed), and couple that with the fact that focused outsource companies like MobileIron and Good Technologies are helping companies manage multiple devices. Now BlackBerry’s future potential revenue problem looks far worse.
3. The Other Guys Keep Getting Better
The new phones are BlackBerry’s first in 18 months. RIM felt that it just couldn’t get its formula right. And while BlackBerry kept delaying the “ship” date of its new phones, its competitors continued to refine their products.
Apple is a great example. Apple typically launches a new phone every year, and executives often joke that each new phone sells more than all previous versions combined. Thus, while BlackBerry was busy figuring out how to design its device, Apple was busy training its customers to either buy its newest phone (earning Apple fat margins), or to buy the old version for a reduced price. Moreover, Apple continued to add additional distribution through international networks.
Nokia Corporation (ADR) (NYSE:NOK) is another great example. Since BlackBerry ’s last launch, Nokia has fallen into and almost emerged from a major crisis. The company’s stock sunk down to $1.63 before rebounding to $4.70 earlier this year. Nokia contrasts BlackBerry in that, while BlackBerry’s lagging technology caused RIM’s downfall, Nokia’s new technologies are its saving grace. For example, Nokia’s new features like “tiles” and a cordless charger have transformed its phones into higher-end devices that even cost less than competitors.
Right now Nokia partners with the major U.S. carriers Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) to push its new Lumia phones. For example, Verizon offers the new Lumia 822 phone, which runs Windows 8, for free with a two-year contract.
And AT&T has two deals going. Consumers can buy the Lumia 820 for $49.99, or they can pay $99.99 for the Lumia 920 and get a second one free, with a contract.
The extra distribution is great for Nokia. AT&T added 150,000 net new subscribers in Q3 2012. It followed up by adding yet another 1.1 million in Q4, with 780,000 subscribers being postpaid, or those who pay at the end of each month. Likewise Verizon – which is giving away Nokia’s phone for free – added 1.5 million net new subscribers in Q3 and set a new record in Q4 when it added 2.2 million subscribers, 2.1 million of them postpaid. In short, Nokia’s free or $50 phone has major distribution.
Conclusion
There is a difference between BlackBerry “the stock” and BlackBerry“the company.” BlackBerry’s share price took off and made a lot of investors a great deal of money. I applaud those who had the guts to buy near the bottom. But BlackBerry as a company is a different story.
BlackBerry’s economics are quickly falling, the barriers to entry have eased, and BlackBerry no longer enjoys a “moat,” especially in the corporate world. Furthermore, its previously loyal customers are fleeing to other devices.
All of this signals to me that BlackBerry is losing its core business. And when businesses decline, eventually the stock price will follow.
The article 3 Reasons Why BlackBerry Lost Its Core originally appeared on Fool.com and is written by Chris Marasco.
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