What is BlackBerry (BBRY) actually worth? The short answer - its cash plus what any suitor is willing to pay for its patents. That may not be the most complex of analysis - but I'll get into that.
The company ended Friday with a market capitalization of $4.57 billion after pre-announcing dismal Q2 results. Those results may have "stunned" many in the market - sales of their BlackBerry 10 devices were far below expectations and the company is taking a $1 billion write-down of excess inventory. During the pre-announcement, shipments of Q10 and Z10 devices were likely less than a million units, while the BlackBerry 7 devices accounted for much of the company's handset revenues.
This announcement should not come as any surprise. Before the company announced Q1 results, it was clear that the company was at an inflection point, both on a technical and fundamental basis. The BlackBerry 10 devices were a make or break. And it's clear now - they are break.
I believe that BlackBerry is now heading below $7 per share, to levels last seen a year ago. That's because - at this point - the hope for BBRY to sustain on its own is gone. As the chart below shows, BBRY was at hovering at its low point until a year ago, when the stock started to gain on expectations for the 10 devices. With that bubble burst, it should be heading lower once more.
BlackBerry's cash is the easiest to value. The company has $2.82 billion in cash and short-term investments and no debt. That puts a cash equivalent of $5.48 per share. As of Friday's close at $8.73, the company was valued at just 1.6 times.
Though cash and short-term investments has increased over the past year, some estimates have the company burning through $500 million in cash during the second quarter. That is not good.
To combat that, BlackBerry also announced this week that it will slash 40 percent of its global workforce and focus more on the business customer base. The fact that BlackBerry is cutting much of their staff is a good sign for cash reserves. If the company were to continue producing devices, marketing them and burning through cash, the outlook for BlackBerry becomes much less clear.
This is the most intangible of BlackBerry's assets. Analysts have pegged BBRY's patents at between $1.25 and upwards of $5 billion. But what some of these estimates may not account for is that BlackBerry is a distressed company now. If potential suitors wait another three or six months, that patent portfolio can be bought even cheaper. BlackBerry holds none of the cards.
Some of the most recent estimates of what BlackBerry's 9,000 patents are worth:
- Raymond James estimates the patents and intellectual property are worth $4.5 billion if broken up.
- MDB Capital has estimated a $5 billion price tag, if sold to a single buyer - or $2-3 billion if sold to a consortium of buyers.
- Scotiabank estimates the value at $2.25 billion.
Of these, Scotiabank's estimates seem the most conservative - with the company actually taking prior history from Nortel's and Motorola's patent sale and discounting BlackBerry's from there. Nortel's patents sold for $1 million each, and Motorola's for $735,000 each. Scotiabank analysts estimate that Blackberry's could average $438,000 each.
So, $2.8 billion in cash; $2.25 billion in patents. That's a $5.05 billion valuation - or nearly $10 per share.
Whereas the cash and patents are positives, the handset division is a big negative. BlackBerry's mobile phone business is the reason it is fading into oblivion - with even once-loyal business customers trading in their Crackberrys for iPhones and Android devices. In fact, some have estimated that winding down BlackBerry's handset could cost the acquiring company $2 billion. That's quite a hefty price tag that could take the per share offer closer to $9, just a 3 percent premium over Friday's close.
In addition, while pulling out of the consumer market might help the company lower costs, with the increase in bring-your-own-device policies in the U.S., it is unlikely to help them gain much market share. As evidence of how much the BYOD policies have gained traction - three years ago, BBRY's market share was 70 percent of corporate market. Now, it's just 5 percent, according to the Wall Street Journal. Among larger employers and the government, perhaps those customers who are most concerned about continuity and security, BlackBerry's share is in the 33-38 percent range.
Even Thorsten Heins realized the link between consumer and enterprise. On the June 28 conference call, Heins said, ""You have to be good in consumer to be good in enterprise [because it is] the employee in the enterprise deciding which device makes it into the enterprise." A lot has changed inside the company since then, but that fact is no different.
But, here's the true question about BlackBerry - with everyone, corporations and consumers alike, realizing that the company will not exist in its current form in a few years (or sooner), who is going to buy their products? Whether BlackBerry's devices and systems are better than its competitors or not, it is unwise for a business to take such a risk when the future is uncertain. Who knows if the company will be bought out and that product shuttered? The company that ends up buying BBRY might want it for one particular strategic advantage.
And, that could be the reason that revenue has dropped off a cliff. In the pre-announced results, BBRY warned that the revenue would be about $1.6 billion, down from $2.9 billion a year ago. I would not expect much of an increase in coming quarters.
BlackBerry certainly has inherent value, which could be in the $9 or $10 per share range in a buy-out. However, the company will likely inflict more pain on its shareholders before it can recruit a suitor and close a deal. That means, in the near term, I would expect the price to head lower.
While I wouldn't sell short the stock at these levels - as a catalyst could come at any time - it does make sense for all those long BBRY to manage the position and cut losses. If you are one of them (unfortunately) and are intent on capturing any upside potential, it is better to own options than have all your capital tied up in owning the stock outright.
But, it's better to not get married to any stock position. Take what's left, move on and learn from the mistake. It's been a painful ride.