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Summary

  • Citron Research published on January, 2014, the original bull case for BlackBerry. I find that its arguments are still valid given what has happened these last six months.
  • BlackBerry continues to be the dominant player in the Mobile Device Management industry and, by some accounts, its advantage has increased.
  • QNX prospects are much better than six months ago.
  • BBM is poised to generate value not only in the enterprise niche, but also in the consumer market.

On January 17th, 2014, Citron Research, a notorious short seller that has made a name for itself identifying soon-to-be bankrupt companies, published a compelling long case for BlackBerry (NASDAQ:BBRY) setting a minimum price target of $15.

Before I read this report, I had bought into the media frenzy about BlackBerry's inevitable bankruptcy. It was only after seriously considering Citron's arguments for BlackBerry that I started to dig deeper. This led me to believe that the company was a serious bull candidate with an unbalanced risk/reward ratio. A couple of weeks later, I decided to go long, ready to hang on to my decision long enough for John Chen to deliver his promised turnaround.

So far, after a great deal of volatility, my investment has moved sideways. Six months have passed since Citron first published the original bull case for BlackBerry. In this article, I revisit Citron's report in light of recent events and attempt to see if their thesis still holds.

Citron's Case for BlackBerry

After John Chen took the reins of the company, one of his first actions was signing the Foxconn deal. This agreement, although the details are unknown, allowed BBRY to hedge the inventory and manufacturing risk of its hardware unit, and focus on software and services. The failure of the market (i.e. mainstream media and Wall Street analysts) to understand this newfound focus was the backbone of Citron's case, citing BBRY as a "heavily shorted stock based on a flawed thesis".

For Citron, the future of BlackBerry is not devices; rather, it is "enterprise software ... with focus on mobile device management solutions and other potential mobile enterprise software opportunities". The new focus of BlackBerry is built around three business segments: MDM, QNX and BBM. In what follows, I'll revisit Citron's arguments for each one of these segments, testing their current validity.

Mobile Device Management

BBRY faces competition in the MDM market mainly from three start-ups: Mobile Iron (NASDAQ:MOBL), Good Technology and AirWatch. Citron provided four arguments for BBRY's MDM prospects on their original report.

First of all, its size. BBRY claims to have more customers than its competition combined.

This claim appears to hold 6 months later, as evidenced by Google Play statistics. Given that BBRY's BES 10 range of installs grew from the 1m-5m to the 5m-10m bracket, BBRY's size relative to its competition might now be even greater than before.

Installs Jan-14Installs June-14
BBRY BES 101m - 5m5m - 10m
Good Technology500k - 1m500k - 1m
AirWatch100k - 500k100k - 500k
Mobile Iron100k - 500k500k - 1m

Source: Google Play

Second, its expertise on security, backed by its Authority to Operate on DoD networks , which makes it the provider of choice in regulated industries and governments around the world.

I believe this statement continues to be accurate. Nevertheless, I expect BlackBerry's advantage on this front to decrease as long as its turnaround is unfinished. BBRY's competitors continue to poach executive-level employees, not to mention its necessary layoffs. These ex-BlackBerry employees could reasonably strengthen the competition. Additionally, given that BBRY is focused on its turnaround, I expect resources to be diverted from R&D. As evidence that the security field might be leveling, investors should remember that Samsung Knox recently obtained its Authority to Operate on DoD networks.

Third, BES 10 is simply a higher-quality MDM product. Since I'm not an expert on MDM software, I rely once again on Google Play statistics, this time on average ratings.

Avg. Rating Jan-14Avg. Rating June-14
BBRY BES 104.04.0
Good Technology3.03.1
AirWatch3.03.0
Mobile Iron2.93.0

Source: Google Play

If we trust Google Play product ratings, BBRY continues ahead of the competition in terms of MDM quality.

Forth, compared to its MDM peers, BBRY's valuation appears dirt-cheap. Back in January, Citron noted that BlackBerry's three main competitors on the MDM space were valued at approximately $1 billion, based on venture capital investments. In the past six months, much has happened to evaluate the current validity of this claim.

  • On January 22, 2014, VMware bought AirWatch for $1.54 billion.
  • Mobile Iron recently completed an IPO, and currently trades at a market cap of around $800 million.
  • Good Technology filed a registration form in May with the SEC to raise $100 million in an IPO. No indication has been given on price, yet some sources estimate its worth around $1 billion.

Given that Mobile Iron and Good Technology are yet to break-even, I compare their EV/Sales multiple to BBRY's own multiple.

Figures are in millionsEVSales (2013)EV/Sales
Mobile Iron$731$1056.92x
AirWatch$1,540$10015.00x
Good Technology$1,000$1606.24x
BlackBerry$4,158$6,8130.61x

Source: Good Technology, Mobile Iron SEC filings, Forbes, BlackBerry's SEDAR filings, Yahoo Finance

Even taking into account the mean of analysts' revenue forecast for FY2015, BlackBerry trades at a 1.06x EV/Sales multiple.

QNX

Writing about QNX, Citron's report focuses exclusively on its role in the automotive infotainment industry. QNX's leader status in this market was crystal clear to Citron back in January. Recent developments not only validate this claim, but reinforce it. On February 24, 2014, Bloomberg indicated that Ford was planning to drop Microsoft (QNX's biggest competitor in the automotive infotainment industry) in favor of QNX in its car technology systems.

In the last months, anyone who has been following BlackBerry knows that the company has taken serious steps to become an important player in the IoT market. Given this new information, QNX appears to be much better positioned to grow now than back in January.

BlackBerry Messenger

Citron viewed BBM as a strategic asset on BlackBerry's product portfolio for enterprise customers. While this has proven accurate, given BBRY's recent launch of the eBBM suite, other developments have proven that BBM revenue prospects on the consumer market shouldn't be ignored:

  • BlackBerry recently began selling stickers on BBM (I defend the economics of BMM's stickers here, in case anyone is interested).
  • BlackBerry launched BBM Channels to distribute sponsored content, charging a fee to interested parties.
  • The company announced its intention to handle mobile payments through BBM.

Since opening BBM to iOS and Android software, its user base has grown from 69 million to 113 million (from March 2013 to March 2014), with 85 million monthly active users. I expect the upcoming earnings report to indicate a healthy user growth rate, given Nielsen's recent study on Indonesia. Nielsen indicates that 79% of smartphone users in Indonesia actively use BBM. Given that Indonesia has approximately 280 million cellphone lines (according to the World Bank) and an estimated smartphone user base of 34%, that means that BBM should have approximately 75 million users in Indonesia alone.

Hardware

Citron completely ignored this segment. Nevertheless, I believe BBRY has taken the right steps to capture value on smartphone sales once again.

It will never return to dominate the market, as it did some years ago. However, it can still profit from consumer-oriented smartphones in selected markets where its brand is still relevant (Z3 in Indonesia) and from products tailored for the enterprise niche.

Conclusion

Citron presented the original bull case for BlackBerry on January, 2014, based on the company's prospects in the enterprise customer niche. Citron argued that MDM, QNX and BBM were the future of BlackBerry. I find that most of Citron's original arguments are currently valid, and in some cases, even stronger. I remain bullish on the stock.

Source: Revisiting The Original Bull Case For BlackBerry