The Good, the Bad, and the BlackBerry

BlackBerry (NASDAQ: BBRY  ) may not be the most attractive stock for investors, but it's definitely the most talked about. On Sep. 27 it announced its second-quarter results, with a net loss of $965 million. Soon after its dismal results, speculations swirled that many companies might want to purchase BlackBerry and outbid Fairfax Financial's (NASDAQOTH: FRFHF  ) $4.7  billion bid.

The company's true value
Currently, there are several potential bidders for BlackBerry, and the sudden interest isn't because of its struggling handset business, but rather its vast patent portfolio. BlackBerry is now in talks with Google, SAP, and Cisco about selling all or parts of its business. BlackBerry's patent portfolio is one of the most diverse in the technology industry, and covers a wide variety of areas such as security, messaging, and LTE. 

Source: Envision

BlackBerry's patent portfolio was ranked 82nd  in the U.S. top 100 patent portfolios by Intellectual Asset Management Magazine. It was also identified as one of 14 companies with "stand-out" portfolios. Its patents have a lifespan of roughly 12.1 years, much higher than Nortel's (UNKNOWN: NT.DL  ) 9.4 years and Motorola's 8.1 years. While there is no fixed market price for BlackBerry's patents, several investment banks have valued it between $2.25  billion-$5 billion. BlackBerry's 7,500 patents and 4,200 granted ones would give the buyer a huge competitive advantage in the current smartphone market.

Google is known for its ability to identify businesses that have potential to deliver future returns. In the case of Motorola, Google was willing to pay a significant premium to compete against Apple. Right now, Google is flooded with lawsuits in the patent space and, therefore, needs to build a strong mobile patent portfolio. This makes BlackBerry's patents, including the Nortel patent, a good investment option for Google. In 2011 , Google lost the Nortel patent auction to a consortium of Apple, Microsoft, and Research in Motion. Thus, through BlackBerry, Google would also gain access to part of Nortel's 6,000 patents, along with BlackBerry's patents, at a much cheaper price.

Falling sales of BB10 phones
After launching the BlackBerry operating system, or OS 7, it took the company a year and a half to develop OS BB10 to get back in the smartphone race with competitors Google and Apple. Its investments and efforts aren't paying off. The company incurred an inventory writedown of $934 million in the second quarter of 2013. The inventory writedown was mostly due to Z10, which it launched to compete against iPhone and Android devices. The company sold 5.9 million units in the second quarter, of which only 1.7 million were BB10 devices.

To improve sales of its BB10 phones, the company planned  to implement further sales incentives with its carrier and distributor partners. Thus, the prices of BlackBerry Z10 phones have been reduced, resulting in different pricing for unsold inventory. This has caused the company to defer revenue of BB10 devices and record low sales in the second quarter, because to realize revenue from unsold phones, the price would have to have been determined beforehand.

Lookout for investors
Not only has BlackBerry struggled to satisfy shareholders, it also wasn't able to convince an additional investor to co-invest with Fairfax Financial. Fairfax is looking for a $1 billion equity investment from institutional investors to acquire BlackBerry.

Fairfax acquisition funding

Bank Loan

$3 billion

Equity investment

$1 billion

Fairfax 10% stake

471 million

Bridge loan

$238.26 million

Total value

$4.71 billion

As Fairfax isn't expected to invest more than its existing stake in BlackBerry (from the table above), it will be hard to find an institutional investor willing to invest around $1 billion. So far, potential investors haven't been officially disclosed, but there are ongoing talks with several U.S. and Canadian pension and private equity funds. The growing skepticism in Fairfax's ability to bring investors is expected to attract other bidders interested in buying BlackBerry.

Bottom line
There are many issues in determining BlackBerry's future. Currently, with falling sales, a large pileup of inventory, and financial woes, the future looks very uncertain. BlackBerry's stock price has lost around 40% of its value in the last six months and is trading around 10% below Fairfax's $9 per share bid.

Comparing BlackBerry to Nokia, whose handset business was bought by Microsoft last month, Nokia emerges as a much better investment option than BlackBerry. However, neither Nokia nor BlackBerry have a trailing P/E since each reported losses. But, Nokia's forward P/E is expected to be 42.02 , which indicates future earnings and a turnaround for Nokia. As for BlackBerry, a lot is dependent on the Fairfax deal. If BlackBerry is unable to attract investors for the Fairfax bid, analysts expect the stock valuation to be around $5 . I believe that investors should wait for further developments before considering any position in this stock.

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