1 Simple Reason to Buy BlackBerry Ltd.

BlackBerry Ltd. (TSX: BB)(NASDAQ: BBRY) is an interesting low-risk, high-reward setup.

| More on:
The Motley Fool

Full disclosure: I’m not a BlackBerry Ltd. (TSX: BB)(NASDAQ: BBRY) fan. I proudly sport an Android smartphone and Google Inc. (NASDAQ: GOOG) Chromebook. I have no particular loyalty to BlackBerry whatsoever.

That said, sometimes you look into the marketplace and you see valuations that make no sense. Even if you have little confidence in a BlackBerry turnaround, there’s one simple reason to buy this stock: It’s being valued at scrap. At current prices, there’s little downside risk, and the stock could have triple-digit upside if anything goes right.

Let me explain…

‘”Terrible to less terrible” situations is a term I use to describe buying assets that have suffered through hard times, digested the bad news, and are poised to run higher. After an asset suffers through tough times, nobody wants to buy it. It’s at this moment — when most people can’t stand the thought of buying that asset — that it will trade for a fraction of its intrinsic value.

If you step in and buy amid the pessimism, you can double your money if a bit of optimism returns to the market and sends the asset back to normal levels. Keep in mind: It doesn’t take great news to double the price of a cheap, hated asset. Things just need to go from “terrible to less terrible.”

I believe we’re seeing that happen night now at BlackBerry. Thanks to the company’s declining handset business, the market has written off the entire company. But is that really appropriate?

Let’s take a look at the numbers. On Thursday, BlackBerry closed at US$10.77. That gives the company a market capitalization of US$5.3 billion. At this price, the market is valuing BlackBerry at scrap and assuming almost no value to its other businesses.

Here is a simple sum-of-parts valuation. The methodology is included below.

BlackBerry Sum-of-Parts Valuation (US$)

Value ($mm) Per Share
Net Cash and Investments $1,283 $2.44
Cash Flow From BBOS Service Fees $881 $1.67
Value of Patent Portfolio $2,633 $5.00
Scrap Value $4,797 $9.11

Net Cash and Investment: This net-cash comprises of cash and short-term investments of $2.32 billion less debt of $1.25 billion. Of course, BlackBerry is still burning cash. Rather than simply plug in the company’s current holdings, I used TD Securities’s forecast cash balance by the end of 2015.

Cash Flow From BBOS Service Fees: Old BlackBerry devices continue to generate service fees. Once again, I used TD Securities’ valuation of this business. Analysts assumed income will continue to decline 10% to 15% per quarter and discounted future cash flows by 12%.

Value of Patent Portfolio: Estimates of BlackBerry’s patent portfolio range from US$5 to US$10 per share. To be extra conservative, I will use the low end of this range.

Voilà! In my most conservative valuation of BlackBerry, the company is worth about US$4.8 billion, or US$9.11 per share. Today, Mr. Market will give you an extensive patent portfolio, a declining service business, and a big pile of cash. And because Mr. Market is so nice, he will throw in the company’s mobile device management division, BlackBerry Messenger, and the QNX operating system for almost free.

That’s the kind of low-risk, high-reward setup investors crave. The bottom line, even if you have no faith in CEO John Chen’s turnaround, there’s little downside in BlackBerry shares at current prices. But if anything goes right at the company, the upside could be huge.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul has no position in any stocks mentioned. David Gardner owns shares of Google (C shares). Tom Gardner owns shares of Google (C shares). The Motley Fool owns shares of Google (C shares).

More on Investing

Double exposure of a businessman and stairs - Business Success Concept

Better Buy: RBC Stock or the Entire TSX?

Royal Bank of Canada (TSX:RY) is a robust stock, but the index fund could be better long term.

Read more »

Family relationship with bond and care

Retirees: 2 Top TSX Dividend Stocks to Buy for TFSA Passive Income

Top TSX dividend stocks now trade at discounted prices for TFSA investors seeking passive income.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Metals and Mining Stocks

Beat the TSX With This Unstoppable Dividend Stock

This dividend stock continues to outpace the TSX and then some, providing you with a dividend that you'll want to…

Read more »

Energy Stocks

Here’s My Top Stock to Buy Now, and it’s Not Even a Question

Tourmaline is a quality energy stock trading on the TSX. Here's why I remain bullish on TOU stock right now.

Read more »

Dice engraved with the words buy and sell
Tech Stocks

Selling Losers Before 2023? Buy These 2 TSX Stocks With the Proceeds 

There is one month to 2023. Now is the time to sell your loss-making stocks, take the tax advantage, and…

Read more »

A meter measures energy use.
Dividend Stocks

TFSA Investors: 3 Safe Utility Stocks to Buy and Hold for Decades

Here are three top utilities to spend some fresh TFSA cash on in the new year.

Read more »

money cash dividends
Dividend Stocks

TFSA Investors: An Easy Way to Boost Your Payouts to $350 Per Month

Because of the tax-free nature of the TFSA, investors have several advantages, especially when buying high-quality dividend stocks.

Read more »

Piggy bank next to a financial report

How to Turn $10,000 Into $200,000 for Retirement

Buy top dividend stocks and use the distributions to acquire new shares.

Read more »