Following the good with Knight Therapeutics, enter the bad and the ugly in the same glory of the past: BlackBerry, whose management keeps bombarding investors and the press alike with a deluge of triumphant but groundless — if not outright misleading — communications.
Beyond headlines, the dreadful reality is that the turnaround in hardware failed while the push into software has yet to return any profit. In addition, despite management’s best efforts, monetization of patents persists elusive.
At $13 a share, adjusted for potential dilution and net cash position, the company trades for $6 billion. What do we get for that price? Let’s unroll a basic sum-of-the-parts to figure it out.
The hardware revenue now comes close to nil — $62 million for the first nine months of 2017, versus $5 billion five years ago — so let us count this segment for zero.
Meanwhile, the patent portfolio value is likely eroding at a fast clip. Excluding remarkable one-time wins such as the Qualcomm case, the segment nevertheless delivered $127 million in revenue last year, and $138 million for the first nine months of 2017.
On a hopeful basis of $150 million in revenue per year and a profit margin of 50% — typical of the licensing business — we could assign a no less hopeful multiple of ten to this bottom line, and thus value the intellectual property at $750 million — admittedly not watchmaker’s work, but better being roughly right than precisely wrong.
(For the anecdote, in late 2014 yours truly valued the whole intellectual property portfolio for roughly $2 billion on a private market basis.)
BlackBerry’s mobile management solution leads a sluggish $4 billion market in which nobody makes money. Indeed, competition is fierce and revenue per user tiny, so profit margins aren’t exactly where you’d expect them to be when you hear the magic word “software”.
However, the business may hold value for larger players such as Microsoft or SAP, should one of them be determined to scale it up as part of a comprehensive service offering. Assigning a reasonable multiple of two times revenue — which is what BlackBerry paid to acquire its former competitor Good Technologies, then in deep financial distress despite being the market leader — the mobile management business would be worth $700 million, more or less its reproduction value following the streak of acquisitions it took to build it up.
We’re still $4.5 billion short of current market valuation, and thus left to assume that QNX — allegedly the crown jewel among BlackBerry’s assets — has seen its value grow twenty-three-fold since its acquisition from Harman for $200 million in 2010.
Installed in 60 million vehicles, QNX generates $150 million in revenue per year — a stagnant performance since 2015. So we’re talking about a pitiful $2.5 per unit. Should we accept to drink management’s Kool-Aid and bet on the prospect that QNX is going to take over the buzzy “connected car” market, we might equally acknowledge that a growing, promising software venture can be valued between five and ten times revenue. So QNX would have to bring in $400 to $800 million to warrant its current valuation.
That won’t happen unless the base of installed vehicles or revenue per unit expand dramatically. Not to cut the ground from under dreamers’ feet, but if there’s money to be made in this market, BlackBerry won’t be alone in trying to seize the opportunity. A formidable competition is already lining up — Google, Apple, Baidu, etc. — with flows of capital and capabilities that dwarf the Waterloo-based company.
BlackBerry also owns a bunch of miscellaneous assets — Messenger, Radar, Certicom, Paratek, a stake in NantWorks, etc. — but since none of these earns anything, safer to count them as a whole for zero. In that respect, according to the prudent hypotheses laid down above — workable at will — an investment at this price entails highly confident expectations about QNX’s prospects.
On a side note, extra caution should be exercised towards the uber-promotional communications released week in, week out. As my mentor used to say back in the days, with so much time being spent on television, one has to wonder where John Chen still finds the time to run his company.