Last Saturday, I stuck my neck on the block by arguing for a BlackBerry (BBRY) turnaround.
I know… it’s the ultimate contrarian call. But hear me out.
I mentioned that four pillars hold the key to rebuilding BlackBerry.
And I already covered the first pillar – automotive infotainment. This involved QNX – the software “microkernel” company that BlackBerry acquired, which is helping Apple (AAPL) embed its CarPlay system into roughly half of its auto manufacturer partnerships.
Let’s dive into the final pillars today…
~ Pillar #2: Hardware
While smartphones once made BlackBerry a dominant mobile force, they’ve since bled the company dry for years.
But in December – just one month after becoming BlackBerry’s new CEO – John Chen struck a deal with Foxconn (Taiwan: 2354) to help stem the $1 billion in quarterly losses from unsold devices – mainly from the Z10, which bombed in the United States.
The partnership signals BlackBerry’s new strategy. Before, it kept trying to play catch-up in an overcrowded U.S. market – and kept getting crushed.
But it’s now taking a different approach, by focusing much of its hardware business in emerging markets.
Starting in the next quarter, Foxconn will launch its version of the BlackBerry – the Z3 – for $200.
Indonesia – the world’s fourth-most populous country and one of the most underserved mobile markets – will be a prime target. So BlackBerry could actually get a jump on its competition.
Importantly, the partnership also gives BlackBerry an opportunity to obtain materials at more favorable costs, reduce fixed costs and minimize inventory risk.
Chen expects the Foxconn deal to make BlackBerry’s hardware division cash-flow positive by February 2016.
Pillar #3: BlackBerry Messenger
BBM is a mainstay of BlackBerry’s hardware. But it has much more value to the company.
For starters, it’s one of the world’s most secure messaging services.
And with spying and data breaches becoming more common, people are demanding better security for their digital data and communications.
BlackBerry is obliging.
In 2009, it paid $106 million for encryption firm, Certicom, in an effort to expand its security.
Thanks to that deal, BlackBerry now has 130 encryption patents that use the most advanced encryption technology – Elliptic Curve Cryptography. Currently, the only other business using Elliptic Curve is the U.S. government.
BBM is now embedded in Windows and Nokia X phones, and is available as an app on other phones, including the iPhone. BBM now has over 300 million subscribers, with 100 million new users every four months.
With Facebook’s (FB) recent $19-billion purchase of WhatsApp and Japanese e-commerce firm Rakuten’s (Japan: 4755) $900-million buyout of Viber Media (another messaging app), this is a hot field. And with BBM, Chen holds a key bargaining chip.
Pillar #4: Enterprise
BlackBerry is the only company with the authority to operate on U.S. Department of Defense networks. The Pentagon recently announced that BlackBerry phones account for 98% of devices in a program aimed at bringing greater mobile access to DoD staff.
This exemplifies BlackBerry’s renewed focus on enterprise sales.
Indeed, the firm is set to launch its new BlackBerry Enterprise Service (BES) platform, BES12, which will breed new enterprise applications for BlackBerry smartphones and other mobile devices.
Companies like Daimler (DDAIF) and Airbus Group (EADSY) are among the customers that have adopted BlackBerry’s older Enterprise Service 10 model. So with a more advanced version in the pipeline, we should see more high-profile clientele upgrade to BlackBerry Enterprise, too.
Since government and business clients have traditionally favored BlackBerry, offering an ecosystem on par with Apple’s App Store would make BlackBerry relevant in the enterprise world again.
Two Ways to Profit From BBRY
BlackBerry reports its earnings on March 28.
Most people trading the stock are playing the short-term news.
That’s what you should do, too.
Since the company’s recovery plan is just starting, we’ll likely see another rough quarter – which will knock down the share price. You should consider playing any potential downside by purchasing the April 2014 $7 put options.
Otherwise, wait for a pullback below $8 to go long on the stock.
Remember… BlackBerry is a speculative play.
However, Chen’s sharp focus has already generated more optimism – BlackBerry shares are up 43% since he took over.
Short sellers are dwindling, too. Short interest in BlackBerry has dropped to 17% from a peak of 33% in 2013. That means there are roughly 100 million fewer shares short weighing down the price.
Conventional wisdom says BlackBerry is already dead. But the company still has time to act strategically, rather than panic.
With $3 billion in cash, the company has a decent cushion until Q4 2015, when Chen foresees BlackBerry as cash-flow positive. Plus, by November of 2014, some of BlackBerry’s intellectual property expenses on third-party patent royalties will expire, wiping out roughly $800 million in fixed costs.
If the business stabilizes, BlackBerry could even become a realistic takeover target.
I believe there’s potential here. And so does major hedge fund manager, Dan Loeb. A few months ago, he revealed that his Third Point fund has a $10-million stake in BlackBerry.
I’m intrigued to see how this plays out.
Your eyes in the Pipeline,