BlackBerry: Raising Goldman's $19 To $20.82

| About: BlackBerry Ltd. (BBRY)

What is the true base value in BlackBerry (NASDAQ:BBRY) today? Numerous articles on BBRY and its new BB10 platform may be misleading traders into thinking there is a do or die situation happening each and every day. That day has come and gone for now. Goldman Sachs has a buy rating on BBRY with a target of $19. Peter Misek at Jefferies reiterated his Buy rating with a target of $19.50 yesterday. S&P, according to our old friend Eric Savitz, has a sell rating on BBRY with a $12 target.

Look, BBRY WAS a great short candidate long ago and when it went to single digits, the shorts should have covered. Rumor mongering about the slow rollout and predicting what total sales will be at this early stage is guesswork. But we know there is a good buzz about the Z10. The remaining stubborn bears are waiting for a BBRY apocalypse when they really should be planning their escape. We will explain why.

There is more to BlackBerry than the new Z10 and coming Q10 smartphones when valuing the company. In fact, there is much more value than investors are currently seeing. First, the BBRY ecosystem everyone has been talking about is the app developers. It's important, alive and well. But there is a more important ecosystem that is embedded in BBRY that should be mined as it exists. It's the customer base of 79 million users. They use the device each day. Facebook (NASDAQ:FB) has a user base of 1.05 billion (10-Q) and its fully diluted (2.62 billion shares) market cap of $74.85 billion or $71.28 per user. Taking the value per customer approach for BBRY would yield $5.631 billion just for the customer base. This user base is something BBRY management must see as a secret weapon.

Using this as a fundamental value, we then start to add information from the 12/1/12 balance sheet. If we add just the net cash from current assets of $2.7 billion to the $5.631 billion above, we get a $8.31 billion sub-total value which would translate to a $15.95 per share using a base of 524 million BBRY shares outstanding. We then have the patents valued by the company at $3.1 billion in intangible assets category. Then there is the property, plant and equipment (PPE) at $2.493 billion and long-term investments of $207 million. Total other current assets other than cash and cash equivalents equal $4.095 billion and all total liabilities equal $3.297 billion.

Netting these two from each other leaves us with $798 million excess assets over liabilities. Adding the $3.291 billion to the $2.493 billion and $207 million above gives us a total $6.391 billion of additional potential value at BBRY found on its balance sheet. If we conservatively took a 60% discount to this combined total value of patents, PPE and other net assets of $6.391 billion, we get $2.5564 billion discounted net potential value which translates to an additional $4.87 per share in value to the share price for the final sum of $20.82. We think this is a floor value for BBRY shares.

Future Upside

The new feature BBRY released at the January launch is bigger than we originally thought. This feature is put on top of another undervalued asset that BBRY investors are not seeing. The BBM network. We have written before of this asset in relation to why it would be valuable to Facebook:

"2. BlackBerry Messenger

It's clear there is an assault by private networks like FB to redirect traffic away from cellular phone networks via the Internet. This has clear revenue implications for cell phone operators and yields more "stickiness" (hours of user's engagement) for FB and loyalty from its user base by lowering their user's cell phone messaging charges. A quantum leap in this pursuit would be buying RIMM mainly for its BlackBerry Messenger network (BBM) private messaging network which recently announced free voice service. BBM is regarded as a secure alternative to SMS messaging. However, it is currently closed to users other than BlackBerrys. Facebook could open this to all its users and expand its use exponentially and provide more security for its user base. This security comes from the BlackBerry PIN system BBM is built upon. BBM together with RIMM's undeniably reliable email service has been estimated to be worth $1.6 billion alone."

As you can see, the value of BBM can't be included in the per user value we derived for Facebook above because they don't have a BBM. Moreover, the $1.6 billion value for BBM above was before they added the video chat feature. To be conservative, we will not add the $1.6 billion to base value calculation.

BBM messaging does not have a price per text which some carriers impose on their users. This network is equivalent to a secure SMS text messaging system. One that BlackBerry users can use to communicate with each other in a closed system. What was revealed at the launch was they have added a video component to it which makes it powerful for video conferencing in a much more secure manner. Dating, gaming, online gambling, live streaming and many other forms of entertainment can be a compelling use for secure video chat. In fact, online gambling is the new buzzword in Silicon Valley and security will surely play a major role in its implementation. And BBRY could offer higher levels of security because they are managing the transmissions and they could charge for this additional security. iPhone users use FaceTime. But the system is buggy and not secure and hard to navigate. Skype has a mono-audio codec. Both are good for birthdays, parties, etc.

But they are not recommended for events that need more security and reliability. The BBM video provides a smooth experience and is transmitted through the BBRY BBM network which manages the video and audio transmissions. The mini HDMI jack on the side of the Z10 can be connected to a large TV monitor in a conference room for a full blown meeting video conference and can also access documents and screen share for live collaboration. BBM video is a free alternative to GoToMeeting which has a monthly subscription fee. Enterprise video conferencing is a fast growing market segment. The prices charged per month per employee are just like software licenses priced per "seat" for other popular enterprise offerings such as Salesforce or SAP at the high end. BBM video is free over Wi-Fi and will be subject to data plan charges depending on individual carrier offering plans. Rogers Wireless, a Canadian carrier selling the Z10, is promoting BBM video free for 1 year over the cell phone network.

The value this brings to the enterprise customer can be significant in terms of video conferencing cost savings. Moreover, it gives a big reason for the enterprise customer to stay. But this does not even touch the value this may add to the consumer "social networking" aspect of the BBM video capability. Live video streaming from events could become the next offering and make this feature natural for viral content. This is what Alicia Keys alluded to in her interview at the BB10 launch in January.

The BB10 built on top of the QNX Operating System differentiates BBRY from other cell phone manufacturers because it is already used by other Machine 2 Machine (M2M) platforms. The QNX OS itself has not been valued separately in our analysis and would only increase the $20.82 base value we have placed on BBRY.

Rumors swirled that BBRY would miss its launch date of January 30, 2013. That did not happen. The new BB10 product would be a loser. Positive reviews so far suggest that is not true. The lack of apps would kill BBRY. Thanks to porting of Android apps and their developer's enthusiasm for new revenue streams, I have downloaded and used them with a Dev Alpha B BB10 device. That's not a valid argument anymore. All enterprise business will be lost. That doesn't seem to be happening any time soon, although there have been some "wins" reported by competitors at companies like Land O'Lakes (they are not exactly protecting national security items at a butter company.) However, we think BBRY addressed a major issue in the bring your own device (BYOD) market where the enterprise market seems to be headed for good. BBRY is now supporting its competitors' products with its device management capability inside the BES enterprise server.

In summary, there are three major assets that have not been "marked to market" that BBRY owns which would add further cushion to our base value analysis: the QNX OS, BBM messaging and the new BB10 devices themselves. A modest rollout of BB10 devices with BBRY's current 4.5% market share in smartphone sales together with licensing the OS and cross fertilization of these platforms in creative "social networking" activities could add tremendous value on top of our base value of $20.82.

Disclosure: I am long BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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