Strictly speaking, this article isn’t a recommendation, although one day it could turn out to be one if the share price reaches the author’s target.
Pedagogically speaking, this article is rather meant to present the valuation of a listed company in a clear and intuitive way, using the so-called ‘sum of the parts’ method already used for the analysis of Renault
After being outdone and then ejected from the mobile phone market (its market share there is now zero), BlackBerry has abandoned its historical activity (hardware) in order to focus on software, where margins and return on capital are potentially much higher.
The energetic John Chen (CEO since 2013) wants to capitalize on the reputation of the Canadian company in the field of security, and on its exceptional client base (the majority of Fortune 500, 15 of the 20 governments of the G20, and a large number of federal governments, etc.).
In 2015 and 2016, over $800 million dollars were invested in various acquisitions – WatchDox, AtHoc, Secusmart – in order to elaborate a complete range of software within BlackBerry Secure.
At the same time, the company concentrated more on the development of QNX, an operating system known for its reliability, already installed in 60 million vehicles and used by numerous constructors and subcontractors in the automobile industry (so far only in non-critical functions).
Finally, the management monetized its patent portfolio via license agreements, while the telephone activity (hardware) was completely sub-contracted to different Asian manufacturers (among which the Chinese company TCL).
The balance sheet has been perfectly sanitized, and today the company doesn’t show any risk of bankruptcy: the $2,5 billion in cash and cash equivalents alone largely cover the total liabilities ($1,45 billion).
At $12 dollars per share, and on a diluted base of 597 million shares (convertibles and stock-options included), BlackBerry is currently valued on exchange at $7,16 billion.
We subtract from this capitalization $1,5 billion in net cash (negative working capital needs included) and thus realize that the market values the total of operational activities of BlackBerry at $5,66 billion.
Is this a fair valuation? We’re going to try to answer this question via a sum of the parts.
After a couple of final failed attempts (Priv, Classic, Passport, KeyOne), the company has completely abandoned its historical activity and licensed the use of its brand to third-party manufacturers. The latter have (so far) not been more successful.
Over the first nine months of 2017, only $62 million of BlackBerry's revenue was linked to the telephone business, that is five times less than during that same period a year before ($319 million), and eighty times less than five years ago ($5 billion).
Since it’s in strong decline, we think it’s reasonable to count this activity as zero.
Patents and intellectual property
Once the crown jewel – because BlackBerry was one of the first to apply in North America – the patent portfolio will undoubtedly depreciate as technology evolves, and other competitors also monetize their intellectual property in the mobile phone business.
Except for legal procedures and products/exceptional losses (the Qualcomm case, Nokia, etc.), the licensing activity has generated $127 million in revenue last year, and $138 million during the first nine months of the current year.
Basing ourselves on an annualized base of $150 million in revenue and a profit margin of 50% (common in the licensing activity), and assigning ten times the profits (like we did with Nokia), we value this second activity at $750 million.
This hypothesis seems in line with the value estimations made by private research firms.
This activity encompasses, in a similar software continuation (BlackBerry Secure, ex-BES), a total of tools capable to secure the communication and the mobile devices of a company network or a government.
BlackBerry is the number one in its market, but the latter doesn’t exceed $4 billion, and grows laboriously with 10-15% a year, without anyone really making any money – because the revenue per user is extremely modest.
The activity can, however, harbor a true value for a higher level player that’s able to integrate these functionalities into a much wider range of services – like for example Microsoft, SAP or Oracle.
At two times the revenue from the previous year – an amount comparable to what BlackBerry paid to acquire its old competitor Good Technologies, then in very bad financial difficulties – this activity was worth about $700 million.
We keep this valuation relatively prudent, because, as it is, the growth perspectives and profitability seem limited.
In its communications towards investors, BlackBerry has put the emphasis on QNX, and more in particular on the commercial perspectives of the operating system in the development of self-driving vehicles.
Until now, according to our valuation hypothesis, the market values QNX at more than $4 billion – over twenty times the cost of its acquisition in 2010. The activity currently only generates $150 million in revenue per year.
As the system is installed in 60 million vehicles – a number that doesn’t grow anymore since 2015 – the revenue per vehicle doesn’t exceed $2,5. This very modest performance causes a problem because the activity demands important research and development investments if it wants to break through.
It’s not rare for software companies with a strong potential to be acquired for amounts that are five to ten times worth their sales. In that capacity, QNX should produce between $400 and $800 million in revenue to justify its current valuation.
For a hypothesis like this to become reality, either the installation of the operating system should be expanded into more vehicles, or the revenue per vehicle should increase significantly.
Although they’re not impossible, these perspectives seem optimistic to us, because the competition is fierce, and players that are a lot better capitalized than BlackBerry (for example Google or Apple) don’t hide their ambition on this emerging market of self-driving cars – and on a larger scale on the ‘connected automobile’ market.
BlackBerry possesses and/or operates other assets, among which BlackBerry Messenger (several tens of millions of users worldwide), BlackBerry Radar, Certicom, Paratek, the NOC (Network Operation Center), an investment in NantWorks (that so far produces a negative performance) and several real estate properties, on the balance-sheet for a gross value of $89 million.
Since none of these assets make money we value them at zero.
In conclusion, while we appreciate the quality of the balance sheet and the ambitious transformation, the initiatives explored by BlackBerry don’t produce any tangible results for the bottom line yet. We understand however that a period of amortization is inevitable, and acknowledge that the company doesn’t lack the energy to improve its range of services.
According to our hypotheses (adaptable if you like), an investment at the current price doesn’t include any safety margin (meaning a discount on the value of the assets or profits) and is based on very optimistic growth forecasts for QNX: an investment represents thus a significant speculative dimension, and a maximum risk of capital loss if by chance the hopes of the market don’t come true.
By the way, the super promotional communication of the management makes us very careful. While we understand the need for the company to restore its image after several catastrophic years, we prefer to base our valuation hypotheses on facts rather than declarations of intentions.
The author of this article would be able to acquire BlackBerry shares if the market capitalization would go down again to the net cash equivalent of the company ($1,75 billion), plus two times the revenue of the different software and licensing activities ($1,25 billion), meaning $3 billion in total, a price of $5 per share.
Article published on 12/28/2017 | 22:14