What's BlackBerry Worth and How Far Can It Go? A Contrarian Take
By See It Market May 07, 2013 10:00 am
While shorts may have the mobile device industry right, the market has the BlackBerry wrong.
BlackBerry Valuation – Getting a Ballpark Base Value
The 10-day simple average of the stock is about $14.63, with a trading range of $13.50-$16.43. Valuing this sort of intellectual property is nearly impossible, so I've opted to keep it as simple as possible in looking at BBRY valuation. Using the most recent quarter's balance sheet, I've prepared a simple estimate of what a potential proceeds would be if the company were wound down this year. Here's my base case.
Going through it line by line:
Cash and equivalents – these items have a self-evident recovery value of 100%.
Accounts receivable – provided most of BlackBerry's customers are either carriers or other large corporations, I assumed a 100% recovery rate on the trade receivables and gave 90% to account for some bad debt expense on the "other receivables."
Inventory – for conservatism, I wrote it down to 0% recovery.
Income tax receivable – assuming there is no risk of the taxing authority missing the payment, a 100% recovery is justifiable.
Other current assets and long-term investments – these are largely comprised of government debt, money market securities, and other long-term corporate debt. All of these have relatively liquid markets and don't relate specifically to the core operations of BBRY, so I assumed that a 90% recovery was plausible.
Assets held for sale – although these are immaterial, I wrote them down to 50% as little detail is available on what they are.
Deferred tax assets – if it's winding things down, temporary differences between income tax expense and the actual tax bill cannot be expected to reverse, so I've written this down to 0%.
Property, plant, and equipment – looking at BBRY's most recent information form, roughly $1.4 billion of the gross PP&E related to BBRY specific operations (~$711 million net of depreciation). Backing that out of the total PP&E leaves approximately $1.2 billion, or a 50% recovery.
Intangibles – This is where the fun begins. I would say we've made a fairly strong case for the future of BBRY's patents. I approached this by asking "What would an auction involving Samsung, IBM (NYSE:IBM), Apple, Google (NASDAQ:GOOG), and other tech giants look like?"
Consider what was mentioned earlier: QNX allows each and every user to have their own cloud. This means no server farms for Apple, Google, IBM, or anyone else to maintain, all while still offering the benefit of securely accessing both their programs and files almost anywhere. This is an enormous cost saving to these firms and leads me to believe that BBRY's patents would fetch a pretty penny at auction. In reality, there is no formal auction, but they certainly wouldn't be sold to the buyer with the first offer. As such, I think a 80% recovery seems fair for a base case.
All liabilities ex deferred revenue and deferred tax liabilities – I am assuming that all bills and taxes owing would be paid in full, and therefore am applying a 100% repayment value.
Deferred revenue – Someone has given BBRY cash in advance of it earning the revenue. Presumably, customers will either get their money back or receive their inventory (if they choose to enforce a contractual agreement). The former would warrant a 100% repayment rate, and all else equal, give a liquidation value of $14.00. The latter however, assumes that the revenue would have been physical inventory and that they would have received it. In this case, a repayment rate of 0% is suitable given the recovery on the inventory is also 0%. I've assumed this in the table above.
Deferred tax liabilities – Since temporary differences are not expected to reverse, I've written this down to 0%.
Although I won't walk through each line for the optimistic case and pessimistic case, the major differences are the outcome of a patent sale, recovery on trade receivables, and market values of liquid investments.
Author Max Moore has a position in BBRY.