Let analyze the outcomes from two extreme, the worst to the best,cases of BBRY
If you are long on this stock and plan to stay for a long term appreciation for this stock, then you shall go to read the article “BlackBerry 10: Forget about the phone - it's the OS that really counts” published today in Zdnet as well as the comments from the followers.
As investor, we have to analyze the outcomes from two extreme cases, i.e., the worst and the best, then calculate the risk / reward ratio to decide whether the odd is against us or for us.
Let us look the worst case first, in which that the new phone does not sell well and the company cannot stand along by itself and force the company to find a buyer with fire sale price.
So what will be worst fire sell price?
The current book value is about $18.5 which does not include the majority value of its patents (IP property). Some valued the IP from low $4/share while others said it worth $18/share. Because ause it is fire sale, so let us use the $4 number. Then the actual book value is about $18.5 + $4 = $22.5.
Now let take another $4 out due to the lost in next two years, then the book value drops to $18.5.
Now let us assume that because it is fire sale, so the buyer only offer 50 cent on a dollar based on the book value, and the sell is $9.25.
With current share price of $13, we will lose 30% our money
Now let us analyze the best case scenarios which consist of the following:
1. The new phone sells very well and its market share increases steadily in next 3 or 4 years with following projection.
First year 8%
Second year 20%
3rd yeard 40%
4th year 65% with annual handset sell of 300 millions, average price $600, revenue = 180 billion, profit margin = 30%, gross profit = 54 billion.
2. At the end of 4th years, the user base = 600 millions, service revenue = $50/year per years, total of 30 billion, profit margin = 60%, gross = 18 billion.
3. Again, with above user bases, the sales of apps, music, videos, books and another goods from its Blackberry World generates 10 billion with profit margin at 30% gross profit of 3 billion.
4. The new OS extended its applications to tablets, cars, M2M, healthcares, home entertainment and security as well as Blackberry Book. Here we assume the total revenue is $50 with 30% profit margin and gross profit of $15.
Now let us calculate the EPS
a) Gross profit from 1 to 4 = 90 billion
b) Cost for salary, sales and administration = 15 billion
c) Net profit = 75 billion
d) Tax (assume at the rate of 40%) = 30 billion
e) Total outstanding shares = 600 million (adding another 50 billion to the current number )
f) EPS = 45000/600 = $75/share.
Using multiple of 12, then at that time, the stock will be at $900/share.
% of return from current share price = 900/13 * 100% = 6923%
Reward / Risk Ration = 6923/30 = 20.08.
We all know that people will put money on a stock if the reward / risk ratio is above 4 while here, it is more than 20.
Now, you go to make your decision whether sell or keep it for a long term appreciation