Sorry, BlackBerry: BBM Is Not Worth $5 Per Share


It seems a massive understatement to say the last few days have been eventful for BlackBerry .

Until this weekend, its popular BBM application was exclusive to the Canadian company's own devices. On Wednesday, however, the folks at BlackBerry took to their official blog to confirm BBM would begin rolling out for Android and iPhone customers around the world beginning today.

But they weren't done yet. In the very next post that same day, BlackBerry unveiled its latest flagship smartphone, the BlackBerry Z30, in what was undoubtedly intended as a solid one-two punch to offset the market's recent pessimism surrounding reports the company is attempting to auction itself in pieces to the highest bidders by November.

BlackBerry Z30. Source: BlackBerry

Then, on Friday afternoon, BlackBerry shocked the market by announcing dismal preliminary second-quarter fiscal 2014 results, including a nearly $1 billion quarterly loss and 4,500 job cuts, or around 40% of its entire workforce. This, in turn, caused the stock to plunge by as much as 24% during intra-day trading before it recovered to close down just over 17%.

Unfortunately, that only adds insult to injury after BlackBerry's gut-wrenching 27% single-day drop following last quarter's horrifying report, and disappoints those who were hoping an earnings beat would go a long way toward helping the company demand a higher premium for the parts of its business from potential suitors.

Naturally, then, all eyes will soon turn to a potential sale, so there's no shortage of debate regarding just how much BlackBerry's assets are worth.

BBM, for one, has long been considered a key asset for the struggling smartphone maker, so it was unsurprising when excitement for its prospects reached a fever pitch following the pending expansion of its target audience.

But this also got me thinking again about a recent research note from Scotiabank analyst Gus Papageorgiou, who raised eyebrows last week when he argued BBM could be worth as much as $5 per share in BlackBerry's valuation.

Considering the stock currently sits just below $11 per share, that means the value of BBM alone would comprise nearly half the company's current $5.7 billion market capitalization.

Here's why you should be skeptical
Not to rub salt in BlackBerry's wounds, but I think there are simply too many questionable assumptions involved in reaching this estimate for it to actually mesh with reality.

First, the $5-per-share number hinges on the lofty assertion BlackBerry will be able to increase its current installed user base by more than fourfold, from 60 million to 250 million.

To Papageorgiou's credit, he also points out that WhatsApp, the most popular competing subscription-based application, claims to have 250 million active users. BBM's arguably more compelling feature set, then, combined with its new status as a free app, should theoretically help it win the hearts of at least some of that crowd.

That said, there are two big problems with this train of thought.

First, BlackBerry will no longer be able to rely on its data fees to monetize BBM, which is why the company has been talking for months about making BBM an ad platform to help other companies engage with consumers. As fellow Fool Evan Niu pointed out in July, however, both Facebook and Twitter already have substantial ad platforms in place to do nearly the same thing that BlackBerry intends with BBM. As a result, BlackBerry will undoubtedly have its work cut out for it persuading advertisers that BBM is worth their dollars.

Second, WhatsApp built much of its reputation around its hard stance against selling advertising, so persuading this already-biased group to switch back to a free, ad-supported platform will probably prove much easier said than done. Furthermore, remember BBM will effectively be putting itself squarely in the well-established competitive crosshairs of other free messaging solutions, including Apple's iMessage, Google Hangouts, and Microsoft's Skype.

But let's put those doubts aside and say BBM does somehow manage to more than quadruple its user base to 250 million. What then?

Well, the $5-per-share valuation also assumes BBM would pull in revenue of $300 million per year, so simple arithmetic tells us its annual revenue per user would need to come in close to $1.20.

For those of you keeping track, that's about how well Facebook was monetizing its worldwide desktop ads in early 2011. Sure, it's a rough comparison between two disparate products, but my point is that Facebook's desktop ad platform was already quite mature at that point. Meanwhile, the BBM team is essentially starting its ad strategy from scratch.

Foolish takeaway
I'll admit this doesn't preclude the possibility of a company with deep pockets buying up BBM at a massive, unexpected premium with the aim of merely getting into the game.

In fact, given today's horrendous results and massive layoffs, some sort of buyout looks more likely than ever -- that is, of course, if we ignore the equally plausible scenario in which BlackBerry's acquisition talks could have fallen apart.

In the end, though, I certainly wouldn't put my own hard-earned money on the line to bet on any company grabbing BBM at $5 per share. We can twist the numbers all we want to focus on all the best case, long-term possibilities of BBM to justify that valuation, but I just don't buy it.

Editor's note: An earlier version of this article incorrectly stated that eBay owns Skype. The Fool regrets the error.

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The article Sorry, BlackBerry: BBM Is Not Worth $5 Per Share originally appeared on

Fool contributor Steve Symington owns shares of Apple. The Motley Fool recommends Apple, Facebook, and Google and owns shares of Apple, Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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