This Company's Assets Alone Make It Worth The Risk
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite more than doubling in share price since the lows of last year, BlackBerry (NASDAQ: BBRY) still trades at just over the value of its assets. With stiff competition from competitors like Apple (NASDAQ: AAPL) and Samsung (NASDAQOTH: SSNLF) who have much more money to spend on things like research, development, and marketing, BlackBerry has a tough road ahead if they are to become one of the major players in the smartphone game once again. Are BlackBerry and its new line of smartphones worth taking a gamble on while the price is so low?
The current state of BlackBerry
BlackBerry began making their popular devices in 1999, a time at which hand-held email access and the other features of their phones were cutting-edge technology. As a result, BlackBerry devices became wildly popular among corporations and government institutions, and continued to increase in popularity for years, finally peaking in fiscal year 2011 (calendar year 2010).
BlackBerry’s revenue has declined sharply over the last few years, due to lack of innovation on their part and an excess of innovation from the competition. The company launched their highly anticipated Z10 touchscreen smartphone in the U.S. on March 22, and the company’s future viability is riding on the success (or failure) of their new phones this year.
BlackBerry posted its first ever annual operating loss in fiscal year 2013 (which ended in February), due in part to the Z10 not being released until March. As a result of rapidly falling revenues last year, shares plummeted, falling to just $6.22 at one point, well below the intrinsic value of the company.
To put a value on BlackBerry, a few things need to be considered. First, the company had $2.65 billion in cash and no debt on its balance sheet as of the end of February. This means that of BlackBerry’s share price, over $5.00 of that amount is in free cash. Where it gets a little tricky is when trying to put a value on the rest of the company’s assets.
BlackBerry currently holds about 7,600 patents, which have been estimated to be worth anywhere from $1 billion to $4 billion. This was a topic of frequent debate last year, when going out of business seemed more imminent, but a recent analysis of BlackBerry’s patents by Scotiabank conservatively values them at $2.25 billion, or about $4.36 per share.
Other assets include BlackBerry’s accounts receivable, which add $1.56 billion when subtracting the accounts payable. There are also $469 million in current assets, such as money market and government debt, roughly $1.2 billion of PP&E (property, plant, and equipment), and $221 million in long term investments. The combination of these items adds $3.45 billion, or $6.70 per share.
So, adding up all of this, and using a very conservative patent valuation, we arrive at $16.06 per share in intrinsic value. That is, if BlackBerry were to throw in the towel, this is the amount of cash, in theory, that should be recoverable for shareholders.
The major competitors: the iPhone and S4
So, let’s take a look at what stands in the way of the Z10’s success. The two most popular smartphones currently are the Apple iPhone 5 and the Samsung Galaxy S4. Both have very loyal customer bases, and are very different in some ways.
The iPhone 5 is the sixth generation of the iPhone and features a 4 inch screen with a 16:9 widescreen aspect ratio. One of the most hotly anticipated electronic devices of all time, the iPhone 5 sold over 5 million units in its first three days on the market, and industry analysts estimate that over 55 million have sold all together. With the next generation (the iPhone 5s) widely expected to be released this fall, with such new features as fingerprint and a separate dedicated camera button, Apple is not going to make it easy for BlackBerry to recapture its lost market share.
Apple from an investment point of view has been the topic of seemingly endless media attention. One of the main reasons that Apple shares plummeted from the highs of $705 is precisely because the iPhone isn't the only game in town anymore, nor is it clearly the best. At just over 10 times TTM earnings, the market is simply waiting for Apple to prove its innovative abilities again, and quite frankly, the iTunes Radio just ain't gonna do it. If Apple does indeed come out with a game-changer, this could prove to be one of the biggest investment bargains in the market at its current share price.
The Samsung Galaxy S4, released in late April, has such cutting-edge features as a 5-inch 1080p display, 13-megapixel camera, and such unique features as Air gesture, Smart Stay, and Smart Scroll. The S4 reached 10 million pre-orders within 2 weeks after its announcement, instantly making it the fastest selling Android-powered phone in history. The S4 has recently taken the best-selling smartphone title from the iPhone 5, and looks like it will keep that designation for the time being. As an investment, however, my attitude is "wait-and-see" when it comes to any Asian-based company. Asia's markets have been some of the most volatile in the world recently due mainly to currency fluctuations, but here is one interesting thought: If Apple indeed comes out with an incredibly innovative new iPhone, it could very well cause a significant pullback in Samsung, creating an excellent buying opportunity. This is definitely worth keeping an eye on as new products are revealed...
It’s anyone’s guess
So, will the Z10 successfully turn BlackBerry around? No one knows. While the consensus earnings estimates look decent (profit of 32 cents per share this year), I have never seen a wider range of estimates amongst a group of analysts, who are presumably looking at the same figures, products, etc. There are 36 major analysts currently following BlackBerry, and they estimate between a 60 cent loss and $1.58 profit for this year. In other words, they have no idea! The range is even wider for next year, and analysts predict anywhere from a $1.64 loss to a $1.70 profit.
With all of this uncertainty, you can be sure of one thing. There will certainly be a strong market reaction, one way or another, when 1Q 2014 earnings are release on June 28. So, should you get in ahead of the report? While it is a big risk to speculate on the success of the Z10, the value of BlackBerry’s assets creates a level of downside protection that is rarely seen. Maybe it is worth the risk…after all, if the Z10 beats estimates, even by a little bit, BlackBerry could produce huge gains for those brave enough to buy.
There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.
Matthew Frankel owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!