Back in BlackBerry

 | Jan 23, 2014 | 4:00 PM EST  | Comments
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I've had a long relationship with BlackBerry (BBRY).

I hated the company several years ago for its insular management and board, and I shorted the stock from $70 to $22. I then watched and waited for some oversold level in order to enter on the long side again, thinking some overdone negativity surrounding the company could open up an opportunity.

In November 2012, I did get in on the hope that the new line of BB10 phones would surprise to the upside. There was a share-price ramp leading up to the launch, but then a lot of uncertainty around those phones followed, and then came a humiliating June earnings report with an even more quizzical explanation from then-CEO Thorsten Heins about what was going on.

I got out of my long position the morning of those terrible results.

However -- and perhaps I'm a glutton for punishment -- I am back long BlackBerry as of a few weeks ago.

Why?

Current CEO John Chen has certainly changed my view of the company, and I know that sentiment is one that is quickly spreading. I like Chen's straight talk and his willingness to kill a few sacred cows. That's what he did when he outsourced device manufacturing to Foxconn, instead of continuing to build his devices in Canada and Mexico.

CitronResearch had a pretty good sum-of-the-parts analysis on BlackBerry's value last Friday, putting up a share-price target of $15.

I'm a little more bullish than that. I think this is a stock that's worth $18. Here's my reasoning.

Let's assume that the device business is now worth zero. That's not really fair. The risk of device-building is now gone and, from the past few days of news, we know the Pentagon and other parts of the U.S. government still find BlackBerry devices to be the most secure ones on the market.

So what's left? A lot.

As the Citron report pointed out, BlackBerry is a leader in the multi-device management space (MDM). BlackBerry's MDM business is 3x the size of its three nearest competitors combined. Since each of those guys is valued at $1 billion, you have to assume BlackBerry's MDM unit is worth $3 billion.

Then there's the QNX business, something Chen calls a "crown jewel" of the new BlackBerry. This is the software that's running on a bunch of automobile entertainment systems, as well as the new BlackBerry devices. It's really an Internet of Things play, though. QNX is software that can run on any number of smart devices in a highly efficient way.

We don't know exactly how big this business will be. However, Google (GOOG) just agreed to pay $3.2 billion for an Internet of Things company -- Nest -- with negligible revenue. Is the entire QNX business worth that much? I think QNX fans would say it's worth more. But let's be conservative again and say it's $1 billion.

Some believe BlackBerry Messenger (BBM) is where the company missed the boat in an area that it could have dominated. You could make the case that, had BlackBerry gone cross-platform with BBM earlier on, the firm could have been WhatsApp long before WhatsApp existed. Instead, BBM has 80 million users and WhatsApp has 575 million. But does that mean BlackBerry's BBM is dead? Hardly. In fact, it's stubbornly still popular in many geographies. In some, it's the No. 1 cross-platform messenger. If WhatsApp is worth $11 billion today then, just per a mathematical comparison based on size, BBM is still worth $1.5 billion.

Finally there's the issue of cash and patents. Just for the patents that BlackBerry has bought in the last few years from Ericsson (ERIC) and Nortel (NT), it has a stash worth $1.7 billion. Then there are the ones BlackBerry filed itself. Now, let's assume that the company overpaid. It's likely it still has a portfolio of patents worth $1 billion.

On the cash front, BlackBerry had more than $3 billion on its balance sheet as of last quarter. Bears on this name say it will burn through that in no time. The bulls say this is a company that will get back to cash-flow-positive in one or two quarters. If that's the case, then you still have to count the cash in a sum-of-the-parts analysis. Furthermore, just the other day, BlackBerry announced it would sell its Canadian real estate and lease it back. How much is all that worth? It's not clear, but $1 billion seems to be a conservative guess. Let's count the cash at $3 billion.

Add it all up, and you get to $9.5 billion. That equates to just over $18 per share.

Of course, over the next few years the growth of MDM, QNX (or Internet of Things) and BBM could see their respective values increase considerably. That's the long game.

In the short term, though, there's still a lot of a gap between the current $10 stock price and where I see current "fair value."

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