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Nature, Sports, & Money: Cycles of Life.

Tag: tech

Blackberry Valuation Study: What is $BBRY worth?


I love the keyboard and email!

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.

Why Bother?

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?


Twitter Quarrels with StockTwits over Cash Tags $$

“From ancient grudge break to new mutiny,
Where civil blood makes civil hands unclean.
From forth the fatal loins of these two foes
A pair of star-cross’d lovers take their life”

The announcement that Twitter reclaimed the cashtag [$tag or ‘$’] from StockTwits brought about a unique cocktail of personal feelings.  Upon learning this long-standing agreement was terminated — as an avid user and bull on the company who was fortunate to lunch with CEO Howard Lindzon — it struck me as monumental.

First take for most is something like “Twitter kneecapped StockTwits”.  Others claim that StockTwits is just a copy-cat anyway and they don’t desire cash-tag exclusivity.  Whatever  StockTwits is/was has just been disrupted by Twitter.

The decision to reclaim the cash tag $ is a move sure to incite a saga akin to tortured, passionate lovers abruptly parting ways: intermittent fireworks amid the grinding emotional decay.  With a single conspicuous tweet on Monday night the break-up was broadcasted:

Stocktwits built a community through curation of tweets containing tags like $GOOG, $SPY and $AAPL and combining it with other relevant financial information.  Their tools are top-notch for investment professionals seeking info on stocks, ETFs etc.  An impressive network of professionals generating content fosters a smart culture and pleasurable user experience.

I met CEO Howard Lindzon in Spring 2011, a period encapsulating my search for new professional challenges while coping with my own heartbreak suffered days prior.  It is singularly most intense period of my life.  I hadn’t eaten much in days, sleeping poorly and struggled to reconcile my desire to evolve with yearning for familiarity. Nothing like a meeting with an influential entrepreneur to jostle things into place.

Battling my position in the matrix of modern society I strolled through the rain in Toronto.  With plans to meet for coffee, I sat down nervous, malnourished and wet in a Sushi restaurant across from the CEO of a multi-million dollar tech company. Blankly gazing at the menu trying not to choke on my tongue I demanded a black coffee.

Black coffee, on an empty stomach, in a sushi restaurant.  Howard orders 6 items and looks across the table, “We’ll share.”

Fuck it, let’s do lunch.

The raw fish and general distress caused my focus to be off somewhat, but we engaged on social media, technology, venture capital and investing, the media, and most specifically StockTwits.  What is it, and how can I get involved?

His goals were not modest.  Stocktwits was about the community, its growth potential limitless thanks to effective presentation and curation of cash-tag generated news feed.  Stocktwits attracts a strong demographic increasing the likelihood it could sustain itself with ads, should they avoid being acquired.  He was dialed in on their initiative to become a world-class Investors Relations platform.  Exit strategies? Imagine being worth a fraction of the $20Bil valuation they put on Twitter? Maybe Yahoo Finance places a bid, or a struggling print publication looking for ready-made digital jumps in?  What about Twitter bidding themselves?

What About Twitter?

My gut burned with the niggling idea that Twitter was driving the bus in the whole operation.  Although Howard guarded plans to expand and future partnerships, we acknowledged the plain fact StockTwits — in some form — depended on a 3rd-party source:  Twitter.

With the recent announcement any visions of the utopian scenario in which Twitter is the White Knight Acquirer, have been blurred.  Twitter has chosen to be adversarial, much the way they confronted Tweetdeck when they built upon Twitter infrastructure to improve the user experience.

What about a patent?
If Twitter eliminated the accommodation provided to StockTwits via $ curation, what happens to their business model?  Distressed and beleaguered I do not recall a firm declaration either way on the legal recourse StockTwits may possess should Twitter withdraw their access.    It only percolated to the surface how precocious their venture may be before it was whisked away like the sashimi tumbling into the vacuous gorge that was my stomach.

Now its right in front of their faces.  Twitter dropped a bombshell and broke it off with Stocktwits.  Howard has publicly responded in a blog post here. While this debacle has gifted StockTwits.com a short-term boost in traffic, the end game is unknown.  Can they reconcile, or has their relationship suffered irreparable damages?

Does StockTwits have the stones to look upon the hand that feeds and place a civil action into its grasp? I have no inside knowledge into the outcome, but my suspicion is that legal action is unlikely at this point.  Primarily because of the potential costs of litigation, but alternatively since the response from Mr. Lindzon lacked any indication that a contract, or agreements in principle, had been violated.  It suggests that the original relationship between StockTwits and Twitter was established verbally and not formalized, whatever that means in court…

Lastly, I believe legal action is unlikely because StockTwits is a great product with a strong team that will continue to innovate and deliver.  The site remains up and running with most of its functionality intact.  There is always hope that loves springs eternal, a spark might rekindle their fire, but Howard, Phil and the crew are surely confident they can stand alone and thrive.  Business as usual.

Are Technical Analysts the Best Options Traders?

Dear Options Experts:

Do you feel technical analysis and option straddles are a perfect complement to one another given the ability of a savvy technician to spot upside/downside targets effectively via charts?  What proportion of successful options traders do not rely heavily on technical analysis? 

For example, this chart of $RIMM http://chart.ly/ywv7g2v seems like a ‘good bet’ to touch $33.60 on bullish earnings, and sag to $27.56 – $26.12 on bearish earnings.

It is exactly the topic of Greg Harmons’ (@harmongreg ) post regarding Research in Motion, suggesting a straddle to play RIM earnings http://stks.co/Efa where following a thorough multi-time frame analysis of RIM, Greg concludes:

Sell September 34 Strike Call and Buy September 26 Strike Put for 21c debit.

This gives upside protection for a 16% move. It should also allow a profitable exit on the downside as long as the stock stays under 30, and much more if it falls the full 12.5% or more priced in options. If the stock gaps higher over 34 on earnings you should buy stock to hedge the short call until the morning. If it plays out as the charts suggest let the short call expire and sell the put on any stall that might happen at support at the 27.50 area.

How can one learn the art of positioning around these levels in a similar fashion to a pro?  When the levels are ‘obvious’ such as this, how can one gain an edge when all the pros see the same levels?

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