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Dumb Money Buys Into BlackBerry Head Fake

NEW YORK ( TheStreet) -- When it comes to irrational exuberance, I can't think of a better recent example than the 34% year-to-date gains seen in shares of BlackBerry (BBRY - Get Report). The disconnect that exists between the company's investors and the real world is never-ending.

This is a company that still doesn't know where it's going. It wasn't long ago that BlackBerry shares nearly tripled on the prospects of its new operating system called BB10. Ahead of the launch, some analysts proclaimed that BlackBerry could one day trade in the $40's. BlackBerry stock traded under $10 at the time.

The argument for BlackBerry was that it could license its operating system to hardware rivals like Apple (AAPL) and Microsoft (MSFT). It was (then) seen as a "significant growth opportunity" for the company. In the months leading to the launch, the stock peaked at around $22. But BB10 was dead on arrival. Nobody cared. Yet investors still insist that BB10 is better than iPhones and Android-powered devices.

In fact, in the recent quarter, BlackBerry sold a paltry 1.9 million devices. In Apple's fiscal first quarter, it sold 51 million iPhones. This was despite what Apple's management called "supply constraints." Never mind the fact that this was 3 million more units than Apple sold the previous year (a 7% increase); it was considered a colossal failure. There's a different standard.

In BlackBerry's case, the company's 1.9 million devices sold amounted to roughly half of the previous year's sales. The stock, by that time, had lost half of its value from the low $20's. This, among other reasons, forced out CEO Thorsten Heins last fall. This came right after Heins announced that the board had formed a special committee to "explore strategic alternatives." Investors cheered that news. But weeks later, the stock was in the low single digits.

In came John Chen. In fairness, I'd say Chen appears to have a better pulse on the company. Unlike earlier leadership, Chen has not gone out of his way to make any leap-of-faith promises. He seems to understand BlackBerry's weaknesses and strengths -- albeit it's still very early. But so far, he's earned enough leeway to make on-the-job mistakes.

My problem, though, is the way investors have reacted to some of his statements. Last week, on the heels of Facebook's (FB) $19 billion deal for WhatsApp, Chen said in a CNBC interview that he would accept $19 billion for BlackBerry's BBM messaging service. But why wouldn't he, since $19 billion almost quadruple's BlackBerry's $5.1 billion market cap?

Once again, investors cheered. That the stock is up more than 11% over the past week has all of the makings of a head fake like the ones I've just chronicled. It's not going to hold. Who's going to step up to the plate to buy BBM?

Before you argue that BBM is monetized and WhatsApp is not, consider that BBM has been shedding users over the past couple of quarters. In fact, BlackBerry announced that it was no longer going to disclose user-specific details about BBM during its quarterly announcements.

WhatsApp, on the other hand, boasts that its number of users grows by a million per day. And what exactly has BlackBerry done recently to deserve the support of 11% gains? Was it the introduction of the all-touch Z3? Or was it the new Q10, sporting the physical keypad? Does it even make sense at this point to use cash to produce devices nobody wants?

BlackBerry sold fewer than 2 million phones last quarter, and I don't believe consumers are going to care about these new phones. It's throwing (in this case) bad money after bad. I've heard arguments that BlackBerry's new partnership with Foxconn to outsource its device manufacturing will save the company money. But so what?

BlackBerry's cash has never been the issue. The problem has been its dwindling top line. And to date, there has been no solution. Foxconn will offer only incremental savings at best. And you are kidding yourself if you don't believe WhatsApp's deal didn't have anything to do with the recent rise in this stock. Accordingly, I would be cautious buying up these shares, as they have all the makings of another head fake.

At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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