Blackberry Valuation Study: What is $BBRY worth?
Update (25-Sept-2013): Fairfax came in with a sweetheart $9 bid for BBRY not 4 trading hours after they announced horrible results and material staff reduction as part of broad restructuring. As suggested below, BBRY is worth $7-9. Thanks to Prem Watsa et al for validating the following fundamental analysis.
Having lived in Southern Ontario my entire life, and worked briefly near Waterloo-area Blackberry (formerly RIM) headquarters I am very frequently asked my opinion on the stock price. Mostly I tell people to ignore it, and sell if they own, but more on that later.
Throughout the agonizing drop from pinnacle of the mobile phone pantheon BBRY has always been top of mind. The goal of this post is to KISS and answer the question in the title: what is the stock worth?
During early 2010 the nascent post-GFC recovery pushed shares of BBRY upwards from ~$40 bottom to reach $60-80. After this run I started advocating employees of RIM, and other holders of the shares, divest themselves in favour of the iPhone-producing Apple $AAPL (for the risk takers) or cash (for those less apt to stay in the market). Since then, as we all know, RIM dumped their founders Jim & Jim, overhauled their branding, and oh yea, watched their stock price drop ceaselessly from $80 to $10.
What is the true value of BBRY shares?
To find the rock-bottom valuation we’ll use tangible book value (TBV). This strips out many assumptions that go into valuing a business as a going concern by assuming the worst: BBRY will immediately enter bankruptcy, never sell another device, or collect another nickel from subscribers (which is not going to happen anytime soon).
Using this hypothetical scenario gives us the most basic and reliable valuation. By adding together the Co’s real assets and subtracting their long-term debt we find BBRY tangible book value (TBV) is roughly $7.
To find this value we add two their 2 core assets: cash + real estate ($5.86 + $1.31 = $7.17) and then subtract LT debt ($0) to arrive at TBV of $7.17. This is the theoretical minimum price at which shares should trade around.
As a value investor, it would thus be prudent to buy BBRY if and only if it trades below $6, which will likely to occur IMO sometime in tax-loss season (Nov/Dec 2013).
What about Book Value?
Plain old book value (BV) incorporates some assumptions into our valuation, specifically intangible assets and cash flows. The resultant mixture of data muddies the waters as the value of these elements is less clear and reliable. Adding in these murky elements has ramification on the range of potential valuations and should evoke more scrupulous analysis of the figures below.
Some investors would stop here and proclaim that value is only found below $6 per share and that anything higher is rip off since BBRY is a complete disaster and they have no chance to survive since their sales are about to vapourize. Maybe so. However valuing BBRY as going concern is only fair given they have millions of customers which generate +$3 Billion in sales every 3 months! It’s not the struggling coffee shop in Miramichi, New Brunswick but a massive global enterprise.
Taking a fair outlook on their future business prospects by assuming a significant, but not catastrophic, decline in operational cash flow will boost the value per share. Additionally, we must add the other intangible assets like patents & intellectual property to round out our KISS study.
Starting with the latter, intellectual property & patents where some analysts have suggested BBRY owns $4.00 per share worth of assets. Adding $4 to TBV makes a potential stock price of $10-$11 seem reasonable. However, over the course of the past 6 weeks shares have traded for ~$9 (ignoring the huge leg up over last few days). This is our first of 2 example of the market doubting BBRY through ‘discounting’. By discounting their intangible assets (and cash flow, as well see below), the market doesn’t view the patents value as $4, but more like $9-$7 (Stock Price -TBV) = $2.
You might ask, “Why is the market doubting the patent values and not the cash or RE value?” and the answer is simple: assets which are easy to value (cash & RE) are discounted LESS than that which is complex or valued less reliably (patents etc). We can be fairly confident that TBV is more static and reliable than BV for this reason.
Furthermore, the market is fully discounting cash flow that BBRY generates. Analysts from CIBC modelling their cash flows over the next 5 years and suggest — even with considerable drop off in sales and subscribers — BBRY generates $2 bil/year, which adds $10 of value to each share. The market, however, is calling BS and is valuing BBRY operations at $0. Using these optimistic assumptions, some firms have $20 price targets.
This is a mighty kick in the groin to a former titan of the mobile industry, but investors might view this as a sign that market is wrong and has undervalued BBRY since you can buy the assets of the business and get the cash flow for free.
Note the previous recommendation of staying away until BBRY sells for around $6 still hold to ensure margin of safety and reasonable rate of return to compensate for risk. Will it ever regain former glory? No, at least this author is highly doubtful. Will it reach $6 per share or less? Yes, I believe it will before Xmas this year, but what the hell do I know?
So, what do you think $BBRY is worth?