Last week, Mike Koza made the case that Blackberry (NASDAQ:BBRY) had the potential to double in the next two years provided they first fix their cash flow issues and stabilize the company. Beyond that, Mike sees Blackberry Messenger (BBM) as a major asset that could be worth more than the entire company is now valued, for the right buyer.
When it comes to researching stocks, the opinions I value most highly come from those who have exceptional, long-term track records. Over the past 13 years, Mike Koza’s Marketocracy portfolio has averaged more than 19% a year by investing in 333 stocks and making money on over 61% of them. Over the same period, the S&P 500 has averaged a little more than 5% per year.
In the article from last week, Mike announced that one question he would be interested in knowing the answer to is why those who have stayed with Blackberry over the years have chosen to do so. Understanding the reasons why Blackberry’s clientele have remained loyal to the company is central to understanding the value of their major asset, Blackberry Messenger.
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One of Mike’s top five holdings is Blackberry. His Marketocracy model portfolio has averaged 19% a... [+]
To answer Mike’s question, we screened through our investment research community to identify members who hold Blackberry in their portfolios and asked them to share their insights with us. Four responses stand out to me as worthy of note. Two insights come from members with long-term track records at Marketocracy, and two insights come from relatively new Marketocracy members.
Kraig Smith, who has a 13-year track record at Marketocracy, says:
The government is a big user of the Blackberry network because of its emphasis on security. In my research, I found an article discussing how the President of the United States currently uses Blackberry, but the secret service is trying to identify if there is another equally-secure device that he could use. I believe this was in a recent issue of Government Technology. In addition, many companies restrict company phone issuance to Blackberry as well. Lastly, you have the group of people who have merely become familiar with the Blackberry interface and have no desire to change.
Wayne Dahlke, who has a 10-year track record at Marketocracy, offers up an additional and different perspective:
First, Blackberry lost touch with their core consumer, which is the business professional who demands security. Blackberry devices were formerly the flagship in business mobile devices, predominantly because of their mobile security. Since Apple and Google have managed to meet (and in some cases beat) their security and offer a much better user experience, people have left their devices (and hence their company) in droves.
Second, their devices became much too difficult to use. They tried to copy what Apple and Android devices have done in terms of form factor and usability, but they never quite managed to hit on anything that set them apart. They have just become another phone, and not even a very good one at that.
Third, the space became very crowded with devices and providers. Apple, Samsung, Nokia, and Motorola are all predominant device makers, with Apple, Google, and Windows being the primary sources for operating software and storage. The only thing that everyone has agreed on is that BBM was an great service, but even that was eclipsed by text messaging, MMS messaging, email, and the availability of data services.
I do not see Blackberry regaining its former position in this space unless they can come up with a way to ensure that the software and devices they provide are completely immune to the "metadata" gathering that the NSA is accused of engaging in. Blackberry made their initial breakout in the mobile space by providing enterprise level security, and I would love to see them market to the security space again by offering a device and service that is not susceptible to privacy and metadata violations. Blackberry is one of the only names in mobile that did not have their name splashed all over the headlines when the Snowden information hit the internet, and they should take advantage of that.
Both Kraig and Wayne point to security as the main feature that retains user loyalty to Blackberry. There are those who say that IOS and Android phones can be made as secure as a Blackberry, but it seems that people who really take security seriously are holding out with Blackberry. For example, a recent article in Defense Tech, points out that of the 600,000 mobile devices the military uses, 470,000 of those are BlackBerry devices, while only 41,000 and 8,700 devices are Apple and Android-based, respectively.
I think it is fair to conclude that there is a sizeable market segment that has a good reason to continue with Blackberry. These customers place a high value on the ability to do business securely from their phones, and they are not price sensitive. In short, the market segment Blackberry dominates is a very desirable one.
This conclusion is supported and fleshed out by two opinions from relatively new Marketocracy members. While their track records are going through the initial phase of establishment, these investors are building their credibility in our investment process by developing their track record and sharing good insights with the community.
Joe Anderson has a been building a track record at Marketocracy for 1.3 years now, and he says:
With respect to Blackberry, I own this stock because I feel that the market does not value the company properly. The market seems to be looking at it as a failed handset maker, but John Chen is transitioning it into an Enterprise software firm. In fact, it is already successful as a provider of Enterprise software, which should grow revenues and NOI in this business line for many years into the future. From my perspective, I almost view the company as if the handset business line is already completely defunct and worth zero. However, I still see value in the rest of the company.
BBM adds to that value, but I still see it as secondary to the Enterprise software services. Blackberry has done something really smart, in my opinion, by opening BBM to iOS and Android users, though it has not yet successfully monetized BBM. Should it successfully monetize BBM, I would see that as icing on the Enterprise software cake for Blackberry.
How much value BBM adds to the company is truly the million (billion?) dollar question. At this point, no one really knows the answer. That said, I see a definite danger in extrapolating too much from the WhatsApp acquisition by Facebook to the value of BBM. Facebook might have massively overpaid for WhatsApp, and in any event, comparing BBM to WhatsApp is not an apples to apples comparison. Also, the general public is not privy to Facebook's true future plans for WhatsApp, so it is difficult trying to figure out exactly why Facebook paid what it did.
Calvin Leung, with a track record of just two months, had a very interesting observation that I've included because I think it adds to the overall explanation.
Blackberry is arguably the only manufacturer that is putting their resources behind some respectable keyboard phones such as the new BlackBerry Classic coming this year. All other manufacturers either make keyboard phones their niche side-business or put it in the low-end prepaid market. Most of the Android manufacturers have abandoned the keyboard phone market. Blackberry is the only option for a “premium keyboard phone”. In the mobile space, there are keyboard fans out there. For years, we all typed on keyboards, and there is no reason why keyboards should be eliminated from phone functionality in just a few years. There are a sizable market of early technology adopters that used the Blackberry “thumb-typing” keyboard and appreciated it.
I think Joe’s comment puts the valuation of Blackberry in a good perspective. Blackberry’s current market cap is about $4 billion, and that includes $2.7 billion in cash on the balance sheet. If you assign zero value to the handset business, that means the market is valuing 80 million active users at $1.3 billion, or $16.25/user -- a lot less per user than the $42/user Facebook paid for WhatsApp. I think Joe is right that we should not use $42/user as a benchmark because Facebook may have dramatically overpaid for WhatsApp. After all, WhatsApp’s users were only recently asked to pay $1 per year for their service, whereas in Blackberry’s case, customers have been willing to pay much more than $1/year for the service for a long time. Even if $42/user is not a good benchmark for the value of BBM, I think it shows us how much of a swing in valuation might be possible if John Chen can stabilize the company and show some progress towards monetizing BBM -- as Mike Koza outlined in last week’s article.
I highlighted a portion of Calvin’s comment regarding Blackberry’s iconic keyboard because it helped me to understand the difference between iPhone and Android mobile messaging and Blackberry mobile messaging. If the bulk of your mobile messages consist of three letter abbreviations such as LOL or BRB, then an on-screen keyboard is probably fine.
However, if your messages normally require full sentences or paragraphs (in other words, if you really need to get work done), then a keyboard is likely to be prefered. In the course of researching Blackberry, I've heard from many iPhone and Android users who say that if the message they want to send is longer than a few sentences, then they will wait until they are at a computer to send it. Blackberry’s chiclet-style keyboard is the easiest way to send complex messages from a mobile phone. The lawyer, banker, and the consultant who can send a well-composed reply instantly is generally considered to be more responsive and valuable than those whose responses are delayed until they can get to a computer with a keyboard. I think the keyboard ranks high on the list along with security as a major reason why Blackberry’s customers are indeed more loyal to them than the market believes.
I will admit to being skeptical about Blackberry when Mike Koza first made his case in Part 1 of this article series. However, after hearing from many members in our investment research community, I find myself largely in agreement with Mike. Blackberry can thrive by serving a market segment that values the ability to do real work on a secure mobile device. But, they will have to stabilize the company’s cash flow first before the market will begin to see the potential.
Mike Koza is a civil engineer in California who has an investment style similar to Warren Buffett’s. He runs a value portfolio for our clients in which he works toward the objective of significantly outperforming the S&P 500 over the long term. Underlying this strategy is the belief that the market overreacts to good and bad news about companies, resulting in stock price movements with no direct correlation to a company’s actual value. Purchasing undervalued stocks low and selling them high is the primary goal. Over the past 10 years, his Marketocracy track record shows an annualized return of 19%.
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Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
