Ever since John Chen took over as CEO of BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY), he’s made his strategy very clear. A key component of this strategy has been a shift from handsets towards software.
To his credit, he’s off to a great start so far, and the stock has reacted accordingly. However, the company has also released a lot of new phones. Most recent was the Leap, a US$275 handset that doesn’t even include a keyboard. Furthermore, BlackBerry said that more phones will be released this year, including at least one with a sliding keyboard.
This has made some people very confused. In an interview with Bloomberg, analyst Daniel Ernst said “for a company touting a software turnaround, that’s a lot of handsets.”
So, what exactly is the company doing? More importantly, what effect will this have on the company? Finally, how should investors react?
Not so much of a big bet
With BlackBerry releasing so many new phones, many investors are surely reminded of the bad old days, when unsold devices led to billions of dollars lost. For example, the Z10 (another phone that had no keyboard) suffered nearly US$1 billion in write downs in 2013. If that wasn’t enough, who can remember the Playbook disaster?
These days, the story is very different thanks to one of Mr. Chen’s first moves as CEO. In December 2013, barely a month after he took over, BlackBerry announced a five-year agreement with Taiwanese manufacturer Foxconn. The deal essentially allows BlackBerry to design the phones, while Foxconn builds them. This means Foxconn takes the inventory risk, so we’ll see no more write downs on unsold BlackBerry devices.
So, BlackBerry’s shareholders can calm down. Even if phones like the Leap don’t sell very well, we won’t see the losses pile up. In fact, we’ve even seen positive margins in the hardware division of BlackBerry, despite vastly reduced sales.
Helping with software
At this point, hardware still accounts for about half of BlackBerry’s revenue. So, Mr. Chen’s software shift cannot happen overnight. In the meantime, the company must stay at least somewhat relevant in the handset market. Otherwise, its enterprise software business could suffer.
For example, the Leap is nothing more than an effort to get BlackBerry devices into the hands of young people. Ideally, these new customers will like the applications and security features. Then when they get older and have more decision-making authority, maybe they’ll buy more software services from BlackBerry.
Just keep focusing on the long term
If you’re a BlackBerry shareholder, you should probably ignore what the company is doing on the hardware side. The real opportunity comes with long-term initiatives, such as the highly lucrative Internet of Things market. In the meantime, you should brace yourself for some disappointing handset sales numbers. No one said this would be a smooth ride.
Looking for something a little more reliable than BlackBerry?
Does your portfolio have rock-solid blue chips at its core? If it does…GREAT! If not, you might want to reconsider your strategy.
Either way, we think you should take a look at what our analysts have identified as one TOP stock for 2015 and beyond—a stock with a tollbooth-like business; a solid management team; and a reliable, consistent, and rising dividend—and you can download the name, ticker symbol, and price guidance absolutely FREE.
Fool contributor Benjamin Sinclair has no position in any stocks mentioned.