It shouldn't be a surprise that BlackBerry (NASDAQ:BBRY) didn't succeed with its new BlackBerry10 as the company had hoped, considering the already-solidified supremacy of iPhone and Android in the consumer-smartphone market. As the company that first introduced smartphones, BlackBerry had to mount a fight to try to restore its past glory, and investors were also expecting a comeback of the stock. Its shares surged to almost $18 from as low as about $6 in less than four months prior to the launch of BlackBerry10.
The stock has since fallen back to about $10, causing many uncertainties. But the drop is only a natural reflection of the lackluster performance of the much-hyped BlackBerry10, which really served as a reality check. Time has definitely changed in the consumer-smartphone market, and head-to-head competition with the iPhone and Android may never work for BlackBerry. The only chance the company may still have is to play to its strengths in the enterprise and professional segment of the mobile computing market.
No one, probably not even the company's management, knows what BlackBerry ought to focus on next or if it should even stop targeting mass consumers. But it seems that further perfecting its profitable secure network, software and subscriber services may work out in the company's favor if combined with new mobile devices for enterprises and business professionals, the kind of customers that have traditionally used BlackBerry. Unlike its consumer smartphones, business mobile computing devices can play right into the company's strengths and popularity in enterprise services and as a result, may attract more sales that a BlackBerry's consumer smartphone can never achieve.
Despite business uncertainties, at its current price level of $10, the stock can still have much of an upside but limited downside because of the company's relatively strong balance-sheet positions. Current talks of a breakup or sale of the company have all valued the company at around $5 billion, which really doesn't speak to the numbers in BlackBerry's balance sheet. The company had almost $9.4 billion in shareholders' equity at the end of last quarter, and with 515 million total common shares outstanding, its equity book value comes in at $18.25 a share. It's hard to imagine that any deal would not pay shareholders up close to the stated equity value on the books. On the other hand, the company has more than $2.8 billion cash equivalent on hand and thus, the stock is unlikely worth less than the per-share cash value of $5.48. At about $10 a share currently and taking into account the numbers for equity book value and cash value, the stock may conceivably command an 82 percent upside but only a 45 percent downside, a 2-to-1 reward-risk ratio.
Furthermore, BlackBerry has zero long-term and short-term debt. Thus, even as revenues decline during the turnaround period, there'll be neither the concern of financial insolvency, nor the issue of too much erosion into shareholders' equity. For BlackBerry, it's only a matter of changing in business strategies without the usual accompaniment of financial restructuring. Any future positive moves on the business front can quickly contribute to a potential rise in the stock price. Overall, the company has a very conservative approach to financial management, which becomes highly desirable in times of business difficulties. In addition to having no borrowing, BlackBerry incurs liabilities that are only one fourth of its total assets.
Some believe that BlackBerry's smartphone unit has no value simply because the business currently loses money. But in a breakup sale, various hard assets from the unit could be sold separately for their realizable value. A buyer may not want to include the unit in future operations if it has no business value, but assets of the unit, tangible or otherwise, could be paid for by someone else. Thus in any event, total sale value of the company would be more than the current consensus of $5 billion, which counts only the value of BlackBerry's patents, software and its secure network. This potential undervaluation coincides with BlackBerry's current market capitalization, which is just above $5 billion. If the smartphone unit does have some value in terms of any useful assets it owns, at the current market cap the stock is clearly undervalued if the company is sold today.
With continued quarterly operating losses, the clock may be quickly ticking away any undervaluation opportunities. BlackBerry has lost a combined more than $14 billion in operating income during the last five quarters. At that pace, the company could conceivably lose up to another $42 billion over the next three years or so. With all the accumulated losses, a stock price of above $10 would be no longer justifiable as the extra $4 billion of total book equity over market capitalization eventually disappears. But BlackBerry can still prevent that. Transitioning its consumer-smartphone unit into something of enterprise mobile device making may help BlackBerry reverse losses over time, but it will all depend on where its management wants to go.
If the company is broken up, sold or restructured in a few months, shareholders could reasonably expect being paid at more than the stock's current price level of $10. If management decides to focus on the enterprise and business professional market, such a change of strategies may potentially lead to a successful turnaround. But if the company continues to pursue in the consumer-smartphone market, the stock might be further on its way down as shareholders' equity gradually evaporates from continually subsidizing smartphone losses.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.