If you are not familiar with the phrase that something is "For The Birds", then spend a minute on a web search, and you should come up with a pretty consistent answer. In a nutshell, the phrase refers to something being worthless. That is exactly how I feel when I read all the articles and news flow about shorting BlackBerry (BBRY) and how the company is worth significantly less than the $7B it is currently valued at as of early June 2013. I acknowledge that there are merits to both sides of the argument about the future of BlackBerry. There are scenarios where BlackBerry could see continued subscriber losses and ultimately not gain any traction with the BlackBerry 10 OS that is supposed to turn the company around. On the flip side, the company could see a revitalization from the introduction of the new phones and manage to carve out a small niche piece of the exploding smartphone market. Maybe Thorsten Heins, the CEO of BlackBerry, could be smarter than I have given him credit for in the past. He already could have BlackBerry positioned for a shifting consumer electronics landscape that morphs into something entirely different than what exists in the market today. There is also a third possibility, and it is a combination of the bullish and bearish arguments. BlackBerry just could meander along like it is today... for a very long time. This is in regards to the stock price, level of subscribers, profitability, or one of any other metrics that investors and readers salivate over. If you're bullish on BlackBerry, this third possibility is not what you desire. However, at least you can afford to hold the stock and wait as long as needed for a turnaround to materialize. If you're willing to short BlackBerry, you need to have a gut check about what you expect to get out of your investment. With over 170M shares short as of 5/15/13, against total shares outstanding of about 525M, there are quite a few investors in need of this gut check. The math is ultimately quite simple. If you short a stock, you have the potential of a 100% gain and theoretically the potential for an unlimited loss. If you are long a stock, you theoretically have the potential for an unlimited gain or a 100% loss. This concept holds true for those long BlackBerry, but it is woefully inaccurate for anyone willing to short BlackBerry. The part about unlimited losses is true, but the part about having the possibility for a 100% gain could not be further from the truth.
Shorting BlackBerry At $14 A Share - What Is The Potential Gain?
This may seem like a mundane topic, but the assumption should be that most investors have a price target in mind when they enter an investment, at which point they would exit their position and pocket their gains or stop the bleeding and cut their losses. I continue to question what price target those willing to short BlackBerry have in mind as the target where they would take their gains and run? Is it a 10% gain, a 20% gain, maybe a 50% gain? Anyone willing to short a volatile name such as BlackBerry has to believe the potential reward significantly outweighs the risk. The problem with this argument is that, from the perspective of a short seller, it is counter intuitive when it comes to BlackBerry. There are many great, indisputable facts about why BlackBerry should make a great short candidate. These range from declining revenue, to declining subscribers, to the future decline of high margin service revenue.
What I would tell the short sellers is that there are only two facts that matter and both, unfortunately, are not positive from the perspective of a short:
- By bringing BlackBerry 10 to market, the company has already proven it will survive for years to come
- BlackBerry just emerged from a year where revenue declined 40% from the prior year, and did so with a cash position and overall balance sheet as or more pristine than it was entering the year
The importance of these two facts should not be lost on those holding the 157M shares of BlackBerry short. As another contributor recently detailed, there is a true cost to selling short shares of BlackBerry. As a short seller, how long are you willing to incur that cost?
Going back to fact 1, it is not a bold or brash statement to say the company will survive for years. Many companies would not have survived the product transition that took BlackBerry years to complete. The new product is now in the market. The phones work. BlackBerry loyalists and there are millions of them, are buying the phones. Even if only the BlackBerry loyalists purchase the new phones, the company could survive for years to come with no additional catalysts for growth. Could results be underwhelming? Absolutely. Could this cause the stock to take a temporary nosedive? Without a doubt. I just can't bring myself to believe that investors are willing to try to scrape out a short-term profit on a move lower in BlackBerry stock with the risk being that 157M shorts are left trampling each other heading for the exits if the company actually succeeds. I feel that those short BlackBerry, fundamentally believe that the company is worth at least 50% less than what is valued at today and that it should trade down to that level in short order. I do not believe investors are shorting BlackBerry with the thought that, by 2018, the stock will hit $7 a share. I believe the timeframe for these traders is an extremely abbreviated one. Which leads right into fact 2.
Fact 2 is that BlackBerry has a balance sheet that provides an absolute floor in the price of the stock. Absolute in the meaning that the stock price will not go below that level in the short term. BlackBerry ended the last quarter with $7.3B of current assets and long term investments. The company had $3.4B of current liabilities. That works out to $3.9B of liquid assets after paying off all current liabilities. There is nothing gimmicky or complicated about the above calculation. The assets are all either cash, or could be readily converted to cash if needed. BlackBerry has $7.40 worth of value in just its short-term working capital position. Then you have the property and intangible assets, such as the brand and intellectual property owned by BlackBerry. The company carries these items at $5.9B on its balance sheet as of the end of the last quarter. Going uber conservative, assume that if BlackBerry was sold in a fire sale, it only would receive 1/3rd of the value that these assets are currently valued. This equates to a value of $1.9B for the property and intangibles in a fire sale scenario. This equates to about $3.60 worth of value for these assets. Combined with the value of the working capital detailed above, BlackBerry has at a minimum $12 worth of value sitting on its balance sheet today. This is less than 15% below what the stock currently trades for. For the sake of saving myself endless comments about how I undervalued the assets, I realize what I did. My point is to illustrate that how in a burn the house down scenario, the liquidation value of BlackBerry is just slightly below where the stock trades today.
BlackBerry proved during its multiple year product transition that the company knew how to manage a balance sheet. This is the trump card that BlackBerry wields that those shorting the stock ignore at their own peril. If you're shorting the stock today, you are gambling that not only will the company fail, but that management will also shirk its fiduciary duty to shareholders and allow the intrinsic value on the balance sheet to whither away. Think what you want about BlackBerry the brand, but I am quite certain there is no possible scenario where the company will not monetize its asset base through a partnership or sale if it felt the need.
That is today's lesson for anyone short BlackBerry. You're fighting a company that has survived its greatest test in actually getting its new product to market. You're also betting that management will simply squander the $12 in value sitting on the balance sheet today. I will be the first to tell you I question the long thesis for BlackBerry on a daily basis as to how high the stock could go and how long it might take to for a sustained move higher. However, I never question the short thesis. Because it is quite frankly just gambling. Since the shorts are gambling, they ought to be aware that the deck is stacked against them.