) has been one of the most controversial stocks in the past two
quarters.As of April 15, short interest on the stock was at
174,340,145 shares, or about 33.2% of outstanding shares (including
TSX shorts). For context, as of the same date, short interest in
) is 25.6% and the short interest in
) is about 30.6%. Considering the mobile device landscape, it may
seem like BBRY would make for a great short. Heavy competition
compresses margins and earnings plateau (at best). While shorts may
have the industry right, I've set out to convince readers that the
market has the company wrong. Here is my fundamental, yet
contrarian, take on BBRY valuation and prospects.
Getting the Business Right
Over the last quarter, it's clear that the market has predicated
the survival of the company on the success of the BB10 series (Z10
and Q10) as a mobile
. While device sales will certainly have a meaningful impact on
free cash flows for the foreseeable future, part of my point is
that the company is valuable with no devices at all. The other part
of my point is that the Z10 and Q10 aren't really comparable to the
) iPhone or any of the
(OTCMKTS:SSNLF) products; it's not really a phone. Back in 2010,
BBRY acquired a little Canadian software company called QNX for
approximately $250 million.
To sum up what QNX allows BBRY to do, consider Apple's iCloud
(singular). The iCloud stores everyone's media and allows them to
access it via the Web almost anywhere. QNX allows everyone's home
computer to be their own little cloud, and the Z10/Q10, using QNX,
allow you to connect your PC wirelessly to any device with QNX. The
two key differentiating factors between this and iCloud is that the
iCloud only stores media that runs on software designed by Apple
(i.e., Numbers, Pages, Keynote, iTunes, etc), and it's all stored
on a single server (or family of servers). This is not computing,
and therefore not mobile computing. This is Dropbox for Mac
only…and even Dropbox works better.
Rather quietly, BBRY has both outlined what true mobile computing
means, and patented the stage to make it real. Imagine taking your
computer tower, putting it in your pocket, and taking it with you
anywhere you go and connecting it securely to almost anything. That
'pocket tower' is the Z10 and Q10, and this is why they aren't
Now that I've made my defense of the devices, let's look at what
else QNX is good for. QNX is the platform that BES (BlackBerry
Enterprise Service) 10 operates on. In other words, it is the
platform for its legendary security. Currently, BES generates
around $100/year/subscriber with near 90% margins. At present, BBRY
competes on this security and has now made it available for Android
and iPhone users. The entire corporate side of the smartphone
market can now enjoy BlackBerry security, even if they do not own a
BlackBerry. This is why the company is valuable, even without the
devices. So let's dig into BBRY valuation.
BlackBerry Valuation - Getting a Ballpark Base
The 10-day simple average of the stock is about $14.63, with a
trading range of $13.50-$16.43. Valuing this sort of intellectual
property is nearly impossible, so I've opted to keep it as simple
as possible in looking at BBRY valuation. Using the most recent
quarter's balance sheet, I've prepared a simple estimate of what a
potential proceeds would be if the company were wound down this
year. Here's my base case.
Going through it line by line:
Cash and equivalents
- these items have a self-evident recovery value of 100%.
- provided most of BlackBerry's customers are either carriers or
other large corporations, I assumed a 100% recovery rate on the
trade receivables and gave 90% to account for some bad debt expense
on the "other receivables."
- for conservatism, I wrote it down to 0% recovery.
Income tax receivable
- assuming there is no risk of the taxing authority missing the
payment, a 100% recovery is justifiable.
Other current assets and long-term investments
- these are largely comprised of government debt, money market
securities, and other long-term corporate debt. All of these have
relatively liquid markets and don't relate specifically to the core
operations of BBRY, so I assumed that a 90% recovery was plausible.
Assets held for sale
although these are immaterial, I wrote them down to 50% as little
detail is available on what they are.
Deferred tax assets
- if it's winding things down, temporary differences between income
tax expense and the actual tax bill cannot be expected to reverse,
so I've written this down to 0%.
Property, plant, and equipment
- looking at BBRY's most recent information form, roughly $1.4
billion of the gross PP&E related to BBRY specific operations
(~$711 million net of depreciation). Backing that out of the total
PP&E leaves approximately $1.2 billion, or a 50% recovery.
- This is where the fun begins. I would say we've made a fairly
strong case for the future of BBRY's patents. I approached this by
asking "What would an auction involving Samsung,
(GOOG), and other tech giants look like?"
Consider what was mentioned earlier: QNX allows each and every user
to have their
cloud. This means no server farms for Apple, Google, IBM, or anyone
else to maintain, all while still offering the benefit of
accessing both their programs and files almost anywhere. This is an
enormous cost saving to these firms and leads me to believe that
BBRY's patents would fetch a pretty penny at auction. In reality,
there is no formal auction, but they certainly wouldn't be sold to
the buyer with the first offer. As such, I think a 80% recovery
seems fair for a base case.
All liabilities ex deferred revenue and deferred tax
- I am assuming that all bills and taxes owing would be paid in
full, and therefore am applying a 100% repayment value.
- Someone has given BBRY cash in advance of it earning the revenue.
Presumably, customers will either get their money back or receive
their inventory (if they choose to enforce a contractual
agreement). The former would warrant a 100% repayment rate, and all
else equal, give a liquidation value of $14.00. The latter however,
assumes that the revenue would have been physical inventory and
that they would have received it. In this case, a repayment rate of
0% is suitable given the recovery on the inventory is also 0%. I've
assumed this in the table above.
Deferred tax liabilities
- Since temporary differences are not expected to reverse, I've
written this down to 0%.
Although I won't walk through each line for the optimistic case and
pessimistic case, the major differences are the outcome of a patent
sale, recovery on trade receivables, and market values of liquid
BlackBerry Valuation - Optimistic Case:
BlackBerry Valuation - Pessimistic Case:
Given the base case liquidation value at ~$14.34 and the 10-day
trading range, if you can catch BBRY on the dips, you're
essentially buying the future of mobile computing for free, or a
steep discount at the very least.
Not only does BBRY have promise as a long-term buy and hold (due in
part to my thesis on BBRY valuation), but the stock has had a huge
trading range over the last two quarters, making for a trader's
paradise (or hell).
This article by Max Moore was originally published on
Disclosure: Minyanville Studios, a division of Minyanville
Media, has a business relationship with BlackBerry.