Blackberry (BBRY) reported a revenue decline of 64% year-over-year, a decline of cash on hand, and a non-GAAP loss per share of 8 cents. That loss was much smaller than expected, causing the stock to rise in pre-market and Friday trading. On a GAAP basis, the company’s loss was substantial: $1.20 per share for all of fiscal 2014, as revenues fell to $5.9 billion for FY2014.
Yet the stock rose, because investors’ perception of BBRY’s value is not in its current earnings, but its future potential earnings. Here we will look at how the market’s perceived valuation of BBRY changed as a result of the quarterly results, and to what extent the market anticipated this loss.
Valuing Blackberry
Most crucially for BBRY shareholders is the value of the company’s future business ventures as spearheaded by John Chen, the company’s new CEO. Chen is largely seen by bulls as a brilliant businessman who can turn the company around, providing upside to shareholders. As a result, the stock has risen nearly 25% YTD.
To determine the market’s perceived value of Chen’s changes to the business, we need to first subtract the company’s cash holdings from its market cap. Currently, the company has a market cap of about $4.87 billion and cash holdings of $2.7 billion. In other words, the market values Blackberry’s future business potential at $2.2 billion.
Yesterday, the market did not value the company much less than it does today. Closing the day at 9.05, BBRY had a market cap of $4.77 billion, or about 2% less than its current value.
Determining Future Value
Because BBRY shareholders are anticipating future growth in value, the key with Blackberry is determining what its future revenue streams will be and how it is positioned within the market to capitalize on those streams.
Bulls and bears on the name have debated the value of BBRY’s ability to create in-dash car operating systems and secure messaging services, which have been considered the main drivers of this name’s growth potential in the future. While BBRY still produces a very small number of handsets, this business has been largely discounted from the company’s value since July, when the stock plunged from the low teens to less than $10 per share.
Pricing the Name
At its lowest point, BBRY was selling for $5.44 per share, which translates to a market cap of about $2.9 billion. This was a very low point in the company, when takeover and acquisition rumors were flying and most shareholders were expecting the company to go private or be bought out by a larger player looking to liquidate its constituent parts. At that time, the value of BBRY’s cash equivalent holdings was a key driver of the stock’s value.
The stock has since recovered, with Chen on board. Now bulls on the name are looking at Chen to reinvent the company and find new uses for its infrastructure, holdings, and expertise. With uncertainty about which markets the company will target and how large those markets are, price volatility is likely to continue in the short and medium term.
Questions to Consider
Before going long or short Blackberry, investors must take a very close look at the company’s GAAP net income figures and its revenue trends, with an emphasis on determining what sources of revenue are shrinking and at what rate. If services and b2b products outside of the handset business are shrinking slower than the handset business itself, there is a chance for greater shareholder value in the future if Chen can cause that revenue shrinkage to reverse.
Another important key will be a meticulous accounting of BBRY’s cash holdings. The company has reported cash and cash equivalents, so investors might want to look a bit deeper to see exactly what those cash equivalents are, and if they are accounted for at FMV.
Equally significant on this point: how much of that cash is Chen expected to use in turning around this company. If he is expecting to invest $1 billion in the company to turn it around, that $1b will not remain a risk-free asset for long, and any investor who sees its cash holdings as a floor for the name’s market cap will be miscalculating the company’s long-term risk.
Investing is not easy, and investing in turnaround stories like BBRY is even harder. A careful look at the company’s balance sheets, game plan, and market opportunities is essential before buying and holding the stock.