Seeking Alpha
Long/short equity, value, special situations, contrarian
Profile| Send Message|
( followers)  

This article is a quarterly update in regards to our valuation report for BlackBerry (NASDAQ:BBRY) which was published on January second of this year. Here you can view the January report. We also released an article on December 28, 2012 regarding profiting off the launch of BB10 using options which can be found here. In the valuation report we took the position that BB10 will cause BlackBerry's share price to rise in the short-term but would not be enough to save the company in the long-run. We designated a value of zero for the consumer segment of the business and built a model simply for the enterprise portion of the company. We then identified potential acquirers and applied multiples these companies used in previous acquisitions to develop a target price. We maintain the view that BlackBerry will be acquired in the future. However, we have changed our rating from buy to neutral. This article will highlight a few developments regarding BlackBerry over the past three months.

(Disclosure: We sold our shares in the middle of January when BBRY hit our price target. We no longer hold long, short or any options positions on BBRY.)

As previously stated, we do not feel BB10 will be enough to save BlackBerry. I would like to highlight a key point that many readers skipped while reading our valuation report. We state in the report that BB10 will not be enough to save BlackBerry BY ITSELF. We stated various reasons for this but arguably the most important one is BYOD (bring your own device). BlackBerry is losing market share to companies such as Apple (NASDAQ:AAPL) and Samsung (SSNLF/PK) who offer various products that are integrated with each other. I will not go into this in detail because we already did so in our report.

However, I bring up BYOD for two reasons. First, management acknowledged this on their last conference call. Management stated that they need to expand into vertical markets and to be not just a smartphone company but a mobile computing company. I view this as a necessity or the company will die.

Readers have been quick to point out that they read on XYZ website BlackBerry is looking to go into this area or that area. This is all speculation and rumors. BlackBerry has not announced or confirmed any of these rumors. Therefore, I do not take any of them into account when modeling BlackBerry. Secondly, I have read analysts reports, blogs, and reader comments stating the BYOD is not a "big deal." I view this as being a grave mistake by these investors. In the recently released annual report, BYOD is discussed more times at various locations throughout the report than any other topic. Also, on the last conference call, management addressed BYOD again. My view is that management views BYOD as a concern. I would be naïve to think that I know more about their industry than they do. Therefore, in my opinion saying its not a "big deal" is a grave mistake.

I would like to add that my view on BB10 (and BB7/BB6) saving BlackBerry could be wrong. If I am wrong, I believe it is due to the following. It is well noted that a majority of the company's sales are now coming from overseas, namely emerging markets. This is mainly due to the security features of BlackBerry and their affordability. The area I see potentially helping BlackBerry is expansion into the frontier markets. I recently sent an email to the investor relations department asking if they could provide details into current activities in specific countries as well as their future intentions of providing smartphones in these countries. As of today I have not heard back. Therefore, I will not go into detail about these markets and their potential. Should I receive an email back from BlackBerry, I will address it in a separate article.

As we have stated multiple times, the value of BlackBerry is derived from its enterprise operations. Currently, BlackBerry has deployment in over 90% of Fortune 500 companies. The last conference call was encouraging because management continually stressed the enterprise segment. Although the subscriber base has dropped over the recent quarter, we believe that the super majority of the loss came from the consumer segment.

This loss therefore does not effect our valuation because we are assuming the consumer segment has no value. In regard to the subscriber loss, management stated on the last call that most of the loss was on the prepaid base, not the enterprise segment. Subscriber loss and the launch of the Z10 is where I happen to disagree with management. The comment was made during the conference call that the Z10 was launched first to try and reduce the number of consumer's switching from BlackBerry (i.e. the Z10 is geared towards the consumer and the Q10 is geared towards enterprise because of the popular keyboard). Since it is my personal opinion that enterprise is driving the value of the Company, I believe management should have been focusing on that segment and launched the Q10 before the Z10.

I would also like to provide an update on two of the companies we said may want to acquire BlackBerry; Lenovo (OTCPK:LNVGY) and Dell (NASDAQ:DELL). Lenovo was at the top of our list as potential buyers. Acquiring BlackBerry fits into Lenovo's strategic direction and recent history. Since the publication of our report, Lenovo has released multiple statements about its potential desire to acquire BlackBerry. I do understand that the Canadian government would most likely interfere with this purchase. However, I still feel that some type of deal will be worked out. Reader's have written that there is "no way" the Canadian government would ever let this deal happen because of BlackBerry's involvement with government contracts. A wise person once told me, "never say never." As for Dell, I still believe it would make sense for Dell to acquire BlackBerry. However, I do not see this happening until Dell figures out what is going to happen with its ownership. It may be a while before we have that answer.

As I stated previously, we currently have no holdings in BlackBerry. We will continue to monitor the stock and will be looking for possible entry points. We did not publish an updated version of our model with this report because the data that has been published since we released the report does not have a significant impact on our price range. If we feel a buying opportunity presents itself, we will publish a new report with updated figures.

Source: Valuation Update For BlackBerry