Contemplating Wall Street

This morning I had a chance to sit down with a hot cup (ok, several cups) of coffee and read the recently-published and very bullish report on BlackBerry by Citron Research.  I have a feeling most of you haven’t ever heard of Citron before, but neither had I. That said, I’ve become a big fan of them.

Who is Citron? If you read most of the stories that reference their BlackBerry report from Friday and today, you’d think they were a huge firm. Instead, they’re just private investors who publish really interesting and well-researched reports. They write reports that I wish Wall Street had the nuts to write. The main man behind the brand is Andrew Left. I’m not sure if it’s a one man shop or if he hires research help, but it’s clear from the website that Left is in charge of publishing stuff and he is a private investor not a Wall Street research firm. All of his reports are freely available.

As you might have guessed from the name, “Citron” (French for lemon) tends to focus on what it feels are broken, fraudulent or overvalued businesses. In other words, they write about stocks that they think are lemons. Occasionally they write about stocks that are no longer lemons as was the case with their BlackBerry report last Friday.

It’s worth reading the 12-page report that Mr. Left published. He makes a very strong case for the strength of BlackBerry’s balance sheet and the transformation of the business towards enterprise software and services. Importantly, he spends ample time discussing John Chen and the new management team members that have come in under Chen’s leadership. He points out that BlackBerry’s mobile device management solution is earning much better feedback (in the Google Play store) versus the competition, and he spends ample time ripping other analysts to shreds.

I’ve covered BlackBerry since 2000, so I know the stock’s history better than most observers. In the early days it was covered by Canadian analysts and very few US analysts on Wall Street. When the US analysts moved in it was always the same. BlackBerry was considered a part of the “communications equipment” sector. The US analysts covering BlackBerry were the same guys covering Nokia, Motorola, and other wireless hardware makers. That made sense at the time, but it doesn’t make sense anymore. This is why Citron’s Mr. Left thinks analysts have the story all wrong today.

It’s hard to argue with his logic. I agree with him. The Canadian analyst crowd (those who have covered the stock long enough) have a bit of an advantage because BlackBerry was always a bit of a special situation. Canadian analysts were often earlier to the story (it’s in our backyard) and didn’t cover the other wireless handset makers, so they had more time to dedicate to learning about the intricacies of BlackBerry. With the enormous growth that BlackBerry saw over the last decade, it’s no surprise that everyone has been trained to focus intently on hardware sales. Given the shift of focus to enterprise mobile management, we need to push the reset button on how we evaluate the stock.

It’s pretty obvious to me that BlackBerry is either going to be successful in transitioning to an enterprise play or it’s heading towards complete destruction with essentially zero value

Speaking of pushing the reset button, I think the change of management in the enterprise division of BlackBerry is really important. I’ve been critical of the folks in charge of BES over the past few years. It really felt like BlackBerry wasn’t spending enough energy improving BES. That’s why I’m so happy having seen John Chen take near-immediate action to install new leadership there. It was time for change long ago.  If it were not for these management changes I don’t think I could sit here and write an article that has a more upbeat tone to it. Instead I’d just worry that they’re now entirely focused on an area that’s still being run poorly. In other words, Chen hit the reset button on the management team that is responsible for the future of the company (enterprise software and services).

As a final thought for now, I think a lot of analysts on BlackBerry are being chickens with target prices that aren’t far away from where the stock was trading at the time they published their targets. It’s pretty obvious to me that BlackBerry is either going to be successful in transitioning to an enterprise play or it’s heading towards complete destruction with essentially zero value. I’d definitely prefer the former scenario since I still hold shares (I’ve never sold, for those wondering).

So if I’m right in saying we have a fairly binary outcome, then when the stock was trading at $6 (last month) anything in the $4-10 target price range is pretty gutless.  I’d like to see more analysts make bold calls. For example, Citi had a $4 target price based on what sounds like a complete failure of the business and a sum of the parts valuation.  Here’s the thing:  No tech company is ever worth it’s cash + other assets. As long as the board of directors doesn’t shut down the business (does that ever happen?), they go for broke. I think analysts who really want to make a call on the stock should either say it’s worth nothing (yeah, $0 target price) or they should be saying the business will recover as an profitable enterprise play. 

Maybe this should be the topic of a separate article, but the short version is this: I think a successful BlackBerry in the enterprise (stabilized revenue, profitable, software focus) is worth $20 per share or more.  Zero or $20 … or something like that. Any other call equates to a non-bet.