Summary

Those who say Samsung's (LONDON: ) buyout offer is just a rumor know just as much as those who say it isn’t, who should you listen to?

Blackberry’s poor sales up to now look relatively bleak for improvement, considering an oddly priced holiday season phone line up and design choices.

The stock seems to sit comfortably around $10; this price level seems to be around were the stock will hover in the near future.

Algorithmic analysis is bullish on Blackberry in 2015.

In our previous article, after receiving strong bearish signals for Blackberry (NASDAQ:BBRY) we recommended to short sell the stock in the one month horizon. This eventually materialized to a decline of over 10% and a nice short profit. The problem was that Blackberry had no estimable value, rather very speculative guesses by the market and investors. Recent rumors that Samsung (LONDON: )(005930.KS) might be pursuing Blackberry patents might add enough implied value to make the stock an interesting investment.



Why Blackberry Is Worth Looking At?



Every piece of information we receive has a meaning, sometimes more valuable and sometimes less. When the news broke out that Samsung was bidding on Blackberry it was a much more significant event than most people realized. In fact the information was the first estimate as to what the company’s worth might actually be in the future. Below are some obvious and simple conclusions, assuming the bid was real - which has recently been confirmed by various sources.



1. Blackberry has a product and service Samsung Electronics does not, and they are willing to pay a hefty premium for it. It also appears that due to patents or limitations they are unable to re-create that service themselves.

2. If the reports are true and Samsung’s initial price range is $13.25-$15.5, I assume they did their homework. Thus the stock at the very least should be valued at around $13.25.

3. If Blackberry and its largest investors believe $15.5 is below what the company could make them in the future, than it probably is. If they thought this was their opportunity to make a hefty income which they otherwise could not reach, it is reasonable to assume they would have jumped for the offer.





So is it a total myth, or, are the two parties secretly negotiation? The truth likely lies somewhere in between, as it always does. Those who say there is no buyout possibility know just as much as those who say there is. The financial post claims to have a source which quoted said “I can tell you Samsung is contemplating a purchase”. Reuters claimed that “according to a person familiar with the matter and documents seen by Reuters” Samsung does have an interest in an acquisition. However, both companies denied this as reported by Blackberry and Samsung. The important reason to mention this is that it is a wildcard which could make investors a nice return, and should not be ignored, even though it is in rumor stages.



Blackberry Lineup FY2015, Hardware Revenues Down





Blackberry Phones

Figure 1: The most current Blackberry phones (Source)





The third quarter of fiscal 2015 saw hardware revenues drop 24.2% since 3Q2013, a drop from $476 million to $361 million. The decrease in revenues was mainly attributed to the average decrease in selling price; however, according to Blackberry in the 3Q2014 report they expect “the average selling prices of its [their] devices to increase in the next several quarters due to the higher selling price of the Passport and Classic.”

Although a bit subjective here is how I view it. In terms of hardware there is no doubt Blackberry is behind. The company itself made it clear that they will focus on software and services, which makes at least a (hardware)-(Software/Services) swap with Samsung crucial to their development. The Z10 looks like older Windows Phones, which sold three times above expectation in India. The Q10 tried to imitate the Z10 and Classic to produce a relatively out of style circular (not round edge) phone. After missing global sales for both phones by a large margin in 1Q2014, Blackberry decided to cut production by 50% for the next quarter (2Q2014).

Blackberry launched 2014’s holiday season with its two big guns. The Z30, a phone which starts to compete in design, also has much better front space usage than other models with its 5 inch screen and comfortable dimensions. The cheap US price tag of $225 raises an eyebrow, even with very high sales the margin seems to be too small. On the other hand, the Passport, in terms of design, is refreshing. In terms of creativity I am glad to see that blackberry is willing to step outside the box. Unfortunately the phone seems to be the box. The benefits of a square shaped screen? Apparently you can view square x-ray images in it comfortably; unfortunately, that’s about where the benefits start, and where they end. I would have expected Blackberry to aggressively advertise the benefits of having this shape of a phone, because I am not sold yet. The company seems confident and attached a price tag of $699, would be interesting to see the 4Q2014 report and see if that gamble will pay off. If you want the phone in red apparently you need to throw another $100 in there. The Classic is a good old day’s product; however, quite frankly there are not that many fans left willing to put out $450 for it.





So Why Would You Ever Consider Buying Blackberry Stock?



If a company whose core business is selling mobile devices is currently making average, as interpreted by market sales, it would seem like it would not make an attractive investment. Let us look at the company from Samsung’s perspective in terms of where the value lies after the acquisition. My guess and estimation would be that about 40% of their interest is in Blackberry’s software, while the rest is in Services & Patents (these are very rough guesses). There is no apparent reason why they would be interested in the hardware designs and technologies Blackberry owns, which means that the rest of the company is truly valuable to them.





Now with this in mind we know that Blackberry needs to convert that 7.5B in patents, software, and services value to actual revenue. They can do it by outsourcing their services or regaining mobile devices market share, which can convert that value. Assuming Blackberry’s board and large investors are perfectly aware of this, leads me to assume that they believe they can easily go above that. Note I said easily, because else major stakeholders such as Fairfax Financial (8.82%) and Primecap Management (11.03%) would look to gain the maximum return on their shares.





What does it mean from an investment perspective? It’s simple. Service and patent value is unlikely to decrease, meaning that from a worst case scenario Blackberry sales perform poorly and it is forced to consider a sale to Samsung, which is unlikely to be below the current price of around $10. The second scenario is that the value slowly increases as Blackberry’s service revenues increases; this really depends on the cash flows they generate in the upcoming months. I believe that Blackberry will pull a hidden rabbit out and recapture market share over the upcoming year, or receive a large buyout offer from Samsung. As can be seen below the bottom price support moving average is beginning to go up, which is a positive improvement.





Price Movements

Signal Graph

Figure 2: Price movements of Blackberry in the last 1.5 years (Source)It appears Blackberry has finally found some sort of equilibrium. The last one and a half years was the same simple constant investor over reactions in both selling and buying trends, a true jig-saw. The 20 day SMA was fighting the battle to cross the $10 line, but always dropped before long; however; what can be seen in the chart above is that the jig-saw is slowly reducing, with the most recent swings being relatively small. Hopefully the resistance line will still be $10, but this time it will hopefully represent the bottom and not the top.The fundamental analysis supports our algorithms opinion which is currently pointing in the same direction, and can significantly increase the significance and confidence level of any investment. I Know First is a financial services firm that utilizes an advanced self-learning algorithm to analyze, model and predict the stock market. The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions.Figure 3: I Know First algorithmic bullish forecast from January 2nd, 2015 for BBRY.The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level. On a one year time horizon a signal of 100 is already considered strong, and so the signal of 156 is very strong and has the potential to materialize into more than 50% upside within a year. The model uses artificial inelegance predictive models based on artificial neural networks and genetic algorithms to predict money movements within various markets. I would like to add that Blackberry is notoriously famous for extreme volatility, and should be assessed for risks with care before making any investments decisions. However, with all that in mid I find Blackberry a long stock. I estimate the stock will be volatile in the next two weeks to a month before starting the climb up. This is also supported by I Know First’s algorithmic analysis which on January 29th, 2015 released the bullish signal above for the 1 year time horizon.I Know First Research is the analytic branch of I Know First, a financial startup company that specializes in quantitatively predicting the stock market. This article was written by Daniel Hai. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article.