Sorry, BlackBerry: BBM Is Not Worth $5 Per Share

It seems a massive understatement to say the last few days have been eventful for BlackBerry (NASDAQ: BBRY  ) .

Until this weekend, its popular BBM application was exclusive to the Canadian company's own devices. On Wednesday, however, the folks at BlackBerry took to their official blog to confirm BBM would begin rolling out for Android and iPhone customers around the world beginning today.

But they weren't done yet. In the very next post that same day, BlackBerry unveiled its latest flagship smartphone, the BlackBerry Z30, in what was undoubtedly intended as a solid one-two punch to offset the market's recent pessimism surrounding reports the company is attempting to auction itself in pieces to the highest bidders by November.

BlackBerry Z30. Source: BlackBerry

Then, on Friday afternoon, BlackBerry shocked the market by announcing dismal preliminary second-quarter fiscal 2014 results, including a nearly $1 billion quarterly loss and 4,500 job cuts, or around 40% of its entire workforce. This, in turn, caused the stock to plunge by as much as 24% during intra-day trading before it recovered to close down just over 17%.

Unfortunately, that only adds insult to injury after BlackBerry's gut-wrenching 27% single-day drop following last quarter's horrifying report, and disappoints those who were hoping an earnings beat would go a long way toward helping the company demand a higher premium for the parts of its business from potential suitors.

Naturally, then, all eyes will soon turn to a potential sale, so there's no shortage of debate regarding just how much BlackBerry's assets are worth.

BBM, for one, has long been considered a key asset for the struggling smartphone maker, so it was unsurprising when excitement for its prospects reached a fever pitch following the pending expansion of its target audience.

But this also got me thinking again about a recent research note from Scotiabank analyst Gus Papageorgiou, who raised eyebrows last week when he argued BBM could be worth as much as $5 per share in BlackBerry's valuation.

Considering the stock currently sits just below $11 per share, that means the value of BBM alone would comprise nearly half the company's current $5.7 billion market capitalization.

Here's why you should be skeptical
Not to rub salt in BlackBerry's wounds, but I think there are simply too many questionable assumptions involved in reaching this estimate for it to actually mesh with reality.

First, the $5-per-share number hinges on the lofty assertion BlackBerry will be able to increase its current installed user base by more than fourfold, from 60 million to 250 million.

To Papageorgiou's credit, he also points out that WhatsApp, the most popular competing subscription-based application, claims to have 250 million active users. BBM's arguably more compelling feature set, then, combined with its new status as a free app, should theoretically help it win the hearts of at least some of that crowd.

That said, there are two big problems with this train of thought.

First, BlackBerry will no longer be able to rely on its data fees to monetize BBM, which is why the company has been talking for months about making BBM an ad platform to help other companies engage with consumers. As fellow Fool Evan Niu pointed out in July, however, both Facebook and Twitter already have substantial ad platforms in place to do nearly the same thing that BlackBerry intends with BBM. As a result, BlackBerry will undoubtedly have its work cut out for it persuading advertisers that BBM is worth their dollars.

Second, WhatsApp built much of its reputation around its hard stance against selling advertising, so persuading this already-biased group to switch back to a free, ad-supported platform will probably prove much easier said than done. Furthermore, remember BBM will effectively be putting itself squarely in the well-established competitive crosshairs of other free messaging solutions, including Apple's iMessage, Google Hangouts, and Microsoft's Skype.

But let's put those doubts aside and say BBM does somehow manage to more than quadruple its user base to 250 million. What then?

Well, the $5-per-share valuation also assumes BBM would pull in revenue of $300 million per year, so simple arithmetic tells us its annual revenue per user would need to come in close to $1.20. 

For those of you keeping track, that's about how well Facebook was monetizing its worldwide desktop ads in early 2011. Sure, it's a rough comparison between two disparate products, but my point is that Facebook's desktop ad platform was already quite mature at that point. Meanwhile, the BBM team is essentially starting its ad strategy from scratch.

Foolish takeaway
I'll admit this doesn't preclude the possibility of a company with deep pockets buying up BBM at a massive, unexpected premium with the aim of merely getting into the game.

In fact, given today's horrendous results and massive layoffs, some sort of buyout looks more likely than ever -- that is, of course, if we ignore the equally plausible scenario in which BlackBerry's acquisition talks could have fallen apart.

In the end, though, I certainly wouldn't put my own hard-earned money on the line to bet on any company grabbing BBM at $5 per share. We can twist the numbers all we want to focus on all the best case, long-term possibilities of BBM to justify that valuation, but I just don't buy it.

Editor's note: An earlier version of this article incorrectly stated that eBay owns Skype. The Fool regrets the error.

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Read/Post Comments (18) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 21, 2013, at 1:57 PM, asif1031 wrote:

    Totally agree with you on this Steve!

    Any company even considering a buy out of BBRY at this point will need to consider the risks. Does anyon remember what happened to Palm after HP bought it out? I do, NOTHING.

    That said, patents are merely ideas put on paper. I am sure a good think tank can come up with its own patents and probably do better with its own ideas.

    The writing has been on the wall for some time now for this company. It surprises me that anyone would even try to take a defensive stance for this company. As you mentioned, everything BBRY is doing is probably the right thing for survival, but they are doing everything way way too late. BBRY should have sold itself years ago instead of putting itself up for self after realizing that they've lost the game.

    Good luck to anyone still holding onto this. If you want to make the money back, there is easier money to be found elsewhere. This investment is a dud.

  • Report this Comment On September 21, 2013, at 1:58 PM, asif1031 wrote:

    Grammatical corection: itself up for self = itself up for sale.

  • Report this Comment On September 21, 2013, at 2:11 PM, Oril wrote:

    You are right about at least one thing in this article.

    BBM is not worth five dollars a share which is why it is being offered for free. Everyone likes free stuff and even you fools will likely log on for the ability to communicate with others worldwide at no charge.

    Also no one has ever forecast an earnings beat this quarter, including Blackberry.

    What I find puzzling is fools like yourself profess to have no interest in Blackberry yet spend so much time bashing it down and trying to convince others to have no part of it.

    In any event Blackberry is far from done at this point.

    Enjoy your lineups for the plastic gold colored iPhones.

  • Report this Comment On September 21, 2013, at 2:34 PM, Varmstzjek wrote:

    Sorry BB and Sorry Steve- how do we take this article seriously when you still refer to Skype as eBay Skype...

  • Report this Comment On September 21, 2013, at 3:01 PM, jelp2 wrote:

    Considering the amount of fake BBM apps on Google Play right now and the anxious Android OS owners waiting for the official release, the news of it already in the App Store in other parts of the world, I think there is a demand for BBM which could lead to a nice monetization of the App with upgrades, Channels and even if there are ads, there is no annual fee.

  • Report this Comment On September 21, 2013, at 3:09 PM, Oril wrote:

    I have never encountered any fee to use Google and how is its stock been doing lately?

  • Report this Comment On September 21, 2013, at 3:21 PM, TMFSymington wrote:

    @Varmstzjek: Good catch! old habits die hard, I suppose...consider it fixed.

  • Report this Comment On September 21, 2013, at 4:15 PM, TMFSymington wrote:

    @Oril, sure, BBM is free, but that certainly doesn't mean people will automatically flock to it with other already-established free options from Apple, Google, and Microsoft. Even if BlackBerry claims BBM is superior (and heck, it might be), they're fighting an uphill battle.

    And no, BlackBerry certainly didn't "forecast an earnings beat," and instead chose to vaguely state in June, "the company anticipates it will generate an operating loss in the second quarter." Analysts, in turn, were looking for an operating loss around $0.15 per share on average (and the market was pricing BBRY as such going into the report), so yesterday's pre-announcement showing an adjusted loss per share of $0.47 to $0.51 was significantly worse.

    And believe me, I'm not trying to be mean here...just calling it like I see it.

  • Report this Comment On September 21, 2013, at 4:36 PM, Oril wrote:

    So now you are saying that BBM is not an already well established option. That's just another example of how wrong analysts can be. Particularly the self professed amateur ones like you who write crap for TMF.

    Oh and I am not trying to be mean either just telling like I see it.

    I hope you took lunch to the homeless person waiting in line for your plastic gold colored iPhone.

  • Report this Comment On September 21, 2013, at 4:48 PM, BR14 wrote:

    In todays business environment "customer engagement" is far more important than "customer revenue".

    Just ask Facebook and Twitter.

    If BBM is successful in engaging a couple of hundred million active subscribers, that in itself is an achievement.

    For comparison a recent article I read said Twitter had around 200 million active users.

    If BBM can get close to that number, I'd say it has to be worth a similar amount. Rumour has it they're anticipating at least $1 billion.

    In comparison Facebook raised over $100 billion.

    And at least with BBM there's a clear revenue model. BBM Channels will be used to generate revenue, and it's looking pretty good.

  • Report this Comment On September 21, 2013, at 4:56 PM, TMFSymington wrote:

    @Oril, Let's keep it civil here...

    To entertain your argument, BBM was definitely well established in its previous form as a BlackBerry-only application, but that was when the company could monetize it using their data fees. However, delving into the world of free, ad-supported apps is an entirely different ballgame.

    Does that make BBM for Android and iOS an automatic failure? Absolutely not. But it's anything but an easy win.

    Lunch would be a nice gesture, but remember the gold-colored iPhones are only available in the faster, thinner 5S model, which has a metal casing. ;-)

  • Report this Comment On September 21, 2013, at 6:14 PM, Oril wrote:

    BBM for Android and IOS is currently spreading around the world and will be available for download in North America by tomorrow morning. Looking forward to updating my expensive but still serviceable iphone3 to interact with my blackberry using family and friends.

    No need to fall into the trap of buying into another smartphone upgrade that offers nothing more than flashy colors. Enjoy your lineups.

  • Report this Comment On September 22, 2013, at 12:37 AM, geshundtight wrote:

    Well I am reading a book almost done, "the goal" thoery of constraints, its 20 years old, but its message about manufacturing, is relavent now as 20 years ago, in regards to blackberry. 3 measures of money, 1) through put, what is made and sold, money in , 2) inventory, money on hand, 3) operating expenses, money out. The book states U have to affect 2 of the three, to be sucessfull. Blackberry has only changed, #3 operating expenses., by laying off 40% of its staff The better plan I feelis to increase through put, sales VIA marketing, that U need people to do, and stop making phones, thus lowering inventory., not the other way around as they have done.

  • Report this Comment On September 22, 2013, at 2:32 AM, HelpIsHere wrote:

    No thing there, I wasted my time again.

  • Report this Comment On September 22, 2013, at 8:35 AM, rmiers1 wrote:

    It is clear major player's want to feast on blackberry's accomplishments and wealth. Blackberry stands for privacy which is in stark contrast to the google, Facebook crowd.

    Shame to see American money trying to break/bust the smartphone pioneer.

    My local verizon store was selling the z10 nicely until mysteriously pulled off the shelves

    Have phone. Clearly superior to cheap android.

    Ultimate security, cash, no debt is basic plan for success. Fool on

  • Report this Comment On September 22, 2013, at 12:29 PM, BakoD wrote:

    So Steve, it's 8.73 a share now. Are you short? It would seem so. What do you put their book value at if less than $5? 17% is actually not that precipitous a drop given the news. Don't get me wrong, I wouldn't touch BBRY on either side of the coin.

  • Report this Comment On September 22, 2013, at 6:41 PM, TMFSymington wrote:

    @BakoD: per the disclaimer at the bottom of the article, I have no positions in BBRY. In fact, I personally prefer not to short stocks, and in this case I'm aiming to simply help avoid further big losses.

    Also, remember I'm not talking about the company's total book value, but rather disagree with the widespread notion their BBM service alone is worth $5 per share.

    Fool on!

    Steve

  • Report this Comment On September 22, 2013, at 10:47 PM, Oril wrote:

    As per the disclaimer at the bottom of the article you DO own shares in apple. Whether or not you are currently shorting Blackberry is immaterial as your contentious articles are clearly designed to drive people away from the Blackberry products and stock to the benefit of Apple. Your assertion that you are somehow trying to save other people's money was so hilarious that it almost made me throw up in my mouth.

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