Why is Research In Motion Ltd (NASDAQ:BBRY) so cheap?
As of July 2, Mr. Market has priced the company at $5 billion. I initially found that figure puzzling given that the struggling Waterloo firm has $2.8 billion in cash on its balance sheet and a $9.4 billion book value.
How can a stock, even one as troubled as Research In Motion Ltd (NASDAQ:BBRY), trade at such a discount? The answer requires a little digging into the financial statements.
Cash burn
First of all, the $2.8 billion the company reported in cash and short term investments is a little bit misleading. Generally cash is straightforward to value, but in BlackBerry’s case we need to view that figure with suspicion.
Many analysts predicted Research In Motion Ltd (NASDAQ:BBRY) would begin to burn through its cash reserves as the company rolled out its new BB10 operating system. Incredibly BlackBerry’s cash balance has actually increased since the beginning of the launch. The reason for this odd phenomena is three fold.
First – Blackberry’s accounts payable have reached unsustainable levels with its implied days payable breaching five year highs. Basically, Research In Motion Ltd (NASDAQ:BBRY) has been able to conserve cash by delaying payments to suppliers. But that won’t last forever. As that payable figure returns to normal, it could consume $500 million in cash.
Second – One-off gains have masked BlackBerry’s cash burn. During the first quarter, excluding a one-time tax receivable benefit, the company had a free cash flow burn of $350 million.
Third – As the company becomes more focused on hardware, it will require more capital further reducing its cash balance.
Patents
Many BlackBerry bulls point to the company’s patent portfolio which could be worth a bundle to another technology company.
Research In Motion Ltd (NASDAQ:BBRY) values its intangible assets, including acquired technology and patents, at $2.2 billion. This is usually recorded at cost and then amortized at a rate determined by the accounting department. But there’s good reason to believe this appraisal is too high.
First – Recent settlements for patent infringements have been disappointing.
Earlier this year, Google Inc (NASDAQ:GOOG) sued Microsoft Corporation (NASDAQ:MSFT) for infringing on its Wi-Fi and video encoding patents. The judge in the Microsoft v. Motorola case ruled that Microsoft Corporation (NASDAQ:MSFT) owes a meager $1.7 million in annual royalties for violating Motorola’s patents, rather than the $4 billion Motorola had originally demanded. This calls into question Google Inc (NASDAQ:GOOG)’s $12.5 billion acquisition of Motorola Mobility two years ago.
Second – U.S. President Barack Obama has started cracking down on patent trolls by increasing scrutiny on overly broad patent claims. This could reduce the value of patent portfolios for all technology companies.
Analysts at Macquarie think Research In Motion Ltd (NASDAQ:BBRY)’s patent portfolio may only be worth $1.6 billion. Others think less.
No buyers
With BlackBerry reporting dismal operating results, many analysts think the company could be worth more liquidated. But there’re a few problems with that theory.
Last year BlackBerry hired bankers from JPMorgan Chase & Co. (NYSE:JPM) and RBC to investigate the company’s strategic options – industry code for sell-out. But if a buyer didn’t swoop in at $6 per share it’s hard to see one coming in today with the company’s market share in free-fall and an eroding subscriber base.
Microsoft Corporation (NASDAQ:MSFT) is frequently mentioned as a possible buyer. The company was reportedly in talks to purchase Nokia Corporation (ADR) (NYSE:NOK)’s handset business earlier this year but the deal fell through on concerns about the company’s slumping market share. While Microsoft may still consider BlackBerry, a Nokia-Microsoft deal just makes more sense due to the two firms’ existing partnership in the handset business.
China’s Lenovo Group is also thrown around iBanking water coolers as a possible buyer. But it’s difficult to see the Canadian government approving the deal on security concerns – or just pride.
There’s an old saying on trading desks that a stock is only worth what someone else is willing to pay. If no one is willing to step in to buy Research In Motion Ltd (NASDAQ:BBRY)’s assets, what does that say about the company’s value. Without a breakup, BlackBerry will have to make it on its own as a handset manufacturer – which based on the last quarterly report isn’t going well.
Foolish bottom line
Don’t be fooled by BlackBerry’s cheap valuation. While it looks like you’re buying a dollar for fifty cents, that dollar comes with strings attached. There’s a real possibly your capital will be withered away over time.
The article Don’t Be Fooled by Blackberry’s Cheap Valuation originally appeared on Fool.com and is written by Robert Baillieul.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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