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Thinking of BlackBerry's Value
Posted by: Fede Zaldua (IP Logged)
Date: December 26, 2013 05:27PM

As soon as BlackBerry (BBRY) announced its manufacturing deal with the Chinese manufacturer Foxconn, Mike Lazaridis, BlackBerry's co founder, cut his position by just over three million shares – he now holds less than 5% of the former smart phone leader's shares. Evidently, Lazaridis sees that the chances of the company going into a death spiral have substantially increased. After all, the shares are down by 37% year-to-date, so he wouldn’t have sold if he trusted on the company's current turnaround plans. Let's take a look at BlackBerry's future.


Yet Another Tough Quarter


BlackBerry, still held by John Griffin, reported another tough quarter with lower than expected sales and a big $4.4 billion loss – versus the $1.6 billion loss analysts were expecting. Besides, the company's shipments disappointed the already very low expectations with only 1.9 million shipments – down by 49% quarter-over-quarter. Moreover, even more top-line pressure is expected before BlackBerry's new enterprise-focused turnaround helps to stops losses. On the other hand, service revenues also were disappointing since they decreased by an astonishing 12.6% quarter over quarter.


Focusing on Services and Software


The current management team aims to cut operating expenses by 50% while the deal with Foxconn should help to pare down inventory write downs. Overall, BlackBerry's future depends on its enterprise services and its messaging and QNX business. The company argues its device business could beak-even by 2016 thanks to the Foxconn deal while the software business could provide ample profitability going forward. In fact, BlackBerry's new management targets to be cash flow neutral by the end of 2015 while they plan to be profitable by 2016. I think they are being far too optimistic even when the company's $3.2 billion cash position shall provide time to pursue their turnaround plan.


Low Expectations


If you own BlackBerry shares you should keep your expectations low. When 2013 started it seemed clear to most analysts that a full sale of the company would happen sometime this year. That door seems to have closed for now and the company's future is more uncertain now than ever before even when the management's plan to refocus on messaging and enterprise services does actually make sense. According to Credit Suisse's analysts, if BlackBerry would shut down its hardware segment and just continues to run its services segment over the next two years, the company would be worth around $7 per share, which actually is today's market price.


Nokia (NOK) – now up by 97% year to date – should provide a good “best case scenario” for BlackBerry's shareholders. The European company sold its device segment to Microsoft (MSFT) in order to focus on the company's IPR portfolio (around 30,000 patents and applications), which has significant value and growth perspectives. The worst case scenario is total dissolution, which I see highly unlikely.


What Should You Pay for BlackBerry's Shares?


If we take a 30% margin of safety on the $7 per share valuation with 80% probability and to such figure we add a $1 total dissolution valuation with a 20% probability, we arrive at a per share valuation of $4.25. I wouldn’t buy above such value. Probably, Lazaridis thought the same before taking the decision to sell a substantial portion of his shares.

Stocks Discussed: BBRY, NOK, MSFT,
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