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A month ago I wrote an article called BlackBerry: don't catch this falling knife...yet. In it I suggested that the stock might keep on falling until it reached the \$3.50 to \$4 level, at which point it would become attractive to hedge funds looking to extract value from a break up deal. However, since that time the stock price has managed to stay above the \$6 per share level.

(Click to enlarge)

BBRY data by YCharts

The question is, has BlackBerry's (BBRY) shares stabilized or will they make another move downwards?

Rather than repeat my analysis of BlackBerry's assets and liabilities like I did in my last article I'm going to take a fresh approach to evaluating BlackBerry's ongoing viability. In situations like BlackBerry where there's a lot of moving parts, it's often helpful to step back and look at a company's balance sheet from a high level perspective to see how strong it is.

The financial technique I'm going to use for this is called the Altman Z score which Wikipedia defines as:

The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.

The Z score is given by the following formula: Z = 1.2A + 1.4B + 3.3C + .6D + E, where

A = Working Capital/Total Assets

B = Retained Earnings/Total Assets

C = EBIT/Total Assets

D = Market Cap/Total Liabilities

E = Revenue/Total Assets

1. Total current assets = \$7,659 million, includes \$1 billion Fairfax cash injection.
2. Total current liabilities = \$3,873 million
3. Total assets = \$13,508 million, includes \$1 billion Fairfax cash injection.
4. Retained earnings = \$6,218 million
5. EBIT = -1,235 million
6. Market cap = \$3,160 million
7. Total liabilities = \$4,705 million, includes \$1 billion Fairfax convertible.
8. Revenue = \$11,073 million.

Therefore Z = 1.2X.28 + 1.4X.46 + 3.3X (-.09) + .6X.67 + .82 = 1.9

What does that number mean? Well when Z >3 the company is regarded as safe, when Z <1.8 the company has a high chance of going bankrupt within the following 2 years. When Z is between 1.8 and 3 there is some doubt as to the company's future.

Since BlackBerry's Z score is nearer to 1.8 than 3, it's reasonable to have strong doubts about the company's viability. However, listening to much of the media commentary the company has been declared as good as dead already.

Now, clearly the Altman Z score isn't a perfect predictor of a company's future. It does for instance tend to be quite backward looking as it uses retained earnings and past revenue as the inputs; on the other hand Total Assets includes substantial amount of intangibles as well as plant and equipment, all which is likely going to need to be written down in the future.

It's interesting to compare BlackBerry with AMD (AMD). The Altman Z score for AMD is minus .8, which suggests a far higher chance of bankruptcy for AMD than the Z score does for BlackBerry. Yet few people are worrying about AMD in the way they do with BlackBerry. Last year there were concerns over AMD's future when AMD lost over \$1 billion, but now AMD is considered to have successfully turned itself around under its new CEO, Rory Read.

John Chen is the perfect CEO to turnaround Blackberry

Chen has already turned around one company, Sybase, which involved pivoting the company from databases to mobile enterprise. In Blackberry's case he will need to focus Blackberry on enterprise and services rather than trying to make money on handsets as Blackberry has no hope of going head to head with Apple (AAPL) and Android phone makers.

That doesn't mean that I think it would be possible to exit the handset business altogether as one article on SA suggested, at least not immediately. The problem with that idea is that Blackberry is on the hock for just under \$5 billion in forward purchase obligations for its handsets. Blackberry needs to - somehow - sell as many of those handsets as it can over the next two or three years. At which point it rely exclusively on services to generate revenue.

Blackberry Messenger is potentially quite valuable

The one bright spot in Blackberry's business at the moment is Blackberry Messenger, BBM. BBM has recently been launched on iOS and Android and has been downloaded over 20 million times. That's an impressive total after just 6 weeks, and suggests to me that many if not most of Blackberry's current 60 million BBM users will keep using it even if they switch to Apple or Android for the their phone.

Now how can we value BBM? If we assume that BBM will adopt similar monetization strategies as Facebook (FB) and Twitter (TWTR), which are quite similar to BBM as far as advertising potential goes, then we can compare the value per user of these services along with another more directly comparable messaging service, which is WhatsApp.

 Metric BBM Facebook Twitter WhatsApp* Active users 80 million 1,000 million 232 million 350 million Value per user \$75 \$120 \$100 \$30

*Privately held company so value is estimated

I've assumed that BBM will be at least 80 million, which assumes that as BBM declines on Blackberry's own handsets it will see an offsetting increase on Android and iOS. Now how much should we value each BBM user? I think it should be somewhere between Facebook users and WhatsApp users based on the fact that BBM users tend to have more disposable income on average than WhatsApp users but those users spend less time on BBM than people do on Facebook. That results in \$75 per user or \$6 billion in total

Obviously this is speculative, and the market will discount quite a lot of BBM's value until it becomes clear that Blackberry can successfully monetize BBM.

Final thoughts

When you add the value of Blackberry's existing assets such as its patent portfolio and real estate to the more speculative value of BBM you get to \$9 billion in value or about \$17 per share (this assumes Blackberry's cash pile is depleted in the process of running down the handset division).

This is an optimistic but not completely unrealistic long term outcome for Blackberry investors to hold out for. Therefore I think Blackberry makes for a good speculative buy at this point, with a short term target of \$8, at which point it would make sense to take profits.