A stock with a depressed price that seems cheap on the surface, despite deteriorating underlying fundamentals, is the very definition of a value trap. Investors can be easily lured into these stocks, thinking that a low stock price in isolation is akin to a cheap stock.
That’s exactly what is going on with BlackBerry , a stock that had amazingly risen over the past several months despite little good news regarding its actual business. Investors were reminded of how painful it can be to catch a falling knife when the company’s first-quarter results landed on the market with a thud. Should investors finally leave this stock by the wayside? Or is there a reason for optimism?
Business conditions worsening
BlackBerry reported a surprise loss, defying Wall Street expectations, serving once again to remind investors how foolish it is to rely on sell-side analysts.
In total, BlackBerry lost $0.16 per share in the quarter, far better than the $0.99 per-share loss in the same quarter one year ago. However, analysts expected the smart phone maker to turn a profit of $0.05 per share.
Moreover, the company’s outlook left a lot to be desired. Management is expecting an operating loss in the second quarter. The company’s CEO, Thorsten Heins, attributed this to the ‘highly competitive smartphone market’.
Shares reacted extremely poorly on the news, falling as much as 30% intra-day.
Reason for optimism?
On the bright side, BlackBerry’s total revenue grew 9% in the quarter, year over year. Pronounced strength was seen in North America and Asia-Pacific, where revenues spiked 30% and 35%, respectively.
Moreover, the company shipped 6.8 million smartphones, up 13% sequentially.
However, it’s important to remember these results included the benefits of the much-hyped BlackBerry 10 operating system. Clearly, the new operating system has not had the desired impact.
Furthermore, the company announced it would stop developing new versions of its poorly selling Playbook tablet.
Much better alternatives
Quite simply, investors shouldn’t allocate money to a device maker that isn’t selling many devices. Consumer preferences are clearly elsewhere, namely, Google and Apple , who own the bulk of market share in mobile devices.
There’s no comparing BlackBerry’s operating results to those from Google and Apple in recent months. In its most recent fiscal year, Google grew revenue and diluted EPS by 32% and 9%, respectively.
The company’s success continued into its first quarter, reporting another 31% revenue increase, year over year.
For Apple’s part, while the stock is in the midst of a well-publicized collapse, the company’s fundamentals remain sound. Apple recorded 45% revenue growth and 60% growth in diluted earnings per share in fiscal 2012. This year, despite the market being repeatedly ‘disappointed’ by the company’s numbers, Apple has booked 15% revenue growth over the first six months of the year.
The disparity between BlackBerry and Apple in particular is striking. BlackBerry is reporting losses despite having recently released a new phone and operating system; Apple, meanwhile, is still growing despite having no new products on the market. Just imagine what Apple can do once it has the benefits of a refreshed product portfolio.
The Foolish takeaway
Back in April, I recommended that investors steer clear of BlackBerry and instead favor its juggernaut competitors. At the time, BlackBerry exchanged hands for $14 per share, and has now lost nearly a quarter of its value since that time. That sentiment is only reinforced by BlackBerry’s recent results.
Furthermore, the statements by the CEO himself are trying to tell investors what's really happening. When a chief executive of a smartphone maker blames profit losses on a 'highly competitive smartphone market', what he's really saying is that BlackBerry is being beaten at its own game. The company is simply being crushed by Google and Apple.
Growth investors should give Google clear preference, while value and income investors should prefer Apple based on the company’s low valuation and compelling 3% dividend yield. In any case, there’s simply no reason to invest in BlackBerry, which, with every passing quarter, looks more and more like a sinking ship.
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