Prem Watsa (Trades, Portfolio), guru investor and CEO of Toronto-based Fairfax Financial Holdings (TSX:FFH, Financial), has more than 36% of his assets under management in BlackBerry (BB, Financial). The position is at the top of his $1.24 billion of holdings, a position he's been building since 2010. At that time, the price was above $50 a share.
The hope with BlackBerry is that the company can pivot into enterprise software since sales of its namesake device have all but dried up. Thankfully, the company has over $2.2 billion in cash (mostly from winning lawsuits) to keep it alive for years to come, but the shift needs to happen quickly. In the last five years, BlackBerry has lost over $8 billion, pushing its book value below $5 from $19, while sales have dwindled from $18 billion down to just $882 million.
Currently, the stock is valued at 6.7 times sales and 2.3 times book, both of which seem higher than the value the brand actually brings to the market. If BlackBerry filed for bankruptcy tomorrow, it would be missed as much as Sears Holdings (SHLD).
- BlackBerry Soars on Strong 2nd-Quarter Results
- Time to Buy the BlackBerry Turnaround?
- 5 Stocks Warren Buffett and Prem Watsa Both Own
5 Stocks Warren Buffett and Prem Watsa Both Own
Going forward, BlackBerry is expected to further improve margins as well as benefit from several new licensing deals and a growing QNX operating system user base. Yet, earnings are still not growing fast enough to justify the $5.6 billion price tag. A decade ago, the company was leapfrogged by Apple (AAPL, Financial) and Samsung (XKRX:005930, Financial) in the mobile device business, and now has to play catchup with customers and rebuild its brand in the market. Maybe BlackBerry can reinvigorate its startup culture and create a next generation platform, but we'll see. Investors, however, would be better served taking a flyer on a different stock at this point.
More importantly, the enterprise mobility market is small compared to devices and companies like VMware (VMW, Financial), Citrix (CTXS, Financial), Microsoft (MSFT, Financial), IBM (IBM, Financial) and SAP (SAP, Financial) are all targeting the same customers as BlackBerry. To date, none of these bigger companies have offered bids to buy BlackBerry, mainly because each has access to more capital and can more aggressively compete in the market.
Best case, the company is expected to earn 20 cents per share in 2019. A more appropriate multiple would be in the 25 to 30 times range. That would put the stock in the $5 to $6 range, a significant drop from today's market price. If investors value the company, however, at the same level as Nokia (NOK), which trades at 1.2 times revenue and who also used to dominate the mobile handset market, the capitalization shrinks to just over $1 billion.
Disclosure: I am not long or short any stocks mentioned in this article.
