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.
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.
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.