Prem and BBRY?

[One World Trader]

Open discussion - does Prem See something in Blackberry that we do not? Year over year losses have declined, however since sales did not meet expectations and Mr. Market has decided to lower BBRY by 27 percent today, does this mean it is not a solid business model? They have announced this week possibly to a change in strategy from hardware to software stating that they have been approved and are going to sell Blackberry Messenger on Apple and Android smartphones as a more steady source of income, what does the board's research show of the strengths/ weaknesses of BBRY moving forward?

 

[Guest valueInv]

As I understand it, investment decisions are made by a HW committee with Prem having veto power.

 

I believe their BBM is being given away for free, therefore no revenue.

 

As far as the business goes, they have been on a downward spiral so far but yesterday's earnings puts them in a tailspin.

 

I'll try to write a more detailed post later.

[Parsad]

As I understand it, investment decisions are made by a HW committee with Prem having veto power.

 

I believe their BBM is being given away for free, therefore no revenue.

 

As far as the business goes, they have been on a downward spiral so far but yesterday's earnings puts them in a tailspin.

 

I'll try to write a more detailed post later.

 

I don't own BBRY, but after reading the report yesterday, I'm not sure how anyone can write off BBRY after one quarter's worth of data.  They are in tough to be sure, and the outcome is unlikely to be good relative to the competition's size and dominance, but I think you need to look at least a year's worth of data, sales, and development to come to any accurate conclusion about whether this attempt at a turnaround will be successful or not.  Those that are always "certain" tend to be oblivious to life's uncertainties!  Cheers! 

[Ballinvarosig Investors]

I don't own BBRY, but after reading the report yesterday, I'm not sure how anyone can write off BBRY after one quarter's worth of data.

Just one quarter of bad numbers? The collapse in subscriber numbers is accelerating.

 

2012 Q3 - lost 1M subscribers.

2012 Q4 - lost 3M subscribers.

2013 Q1 - lost 4M subscribers.

 

The launch of BB10 and the Z10 in particular looks like it has been a disaster. The fact that more people are buying BB7 devices (a platform that is all but dead) says it all. Even the diehards on Crackberry sound utterly gutted and demoralized. BB10 not being ported to the Playbook looks like the final kick in the teeth for many of them.

 

If the Q10 or the Q5 don't gain any traction in the next quarter, then the best thing Blackberry could do is just kill off BB10 rather just burning through cash.

[Guest valueInv]

As I understand it, investment decisions are made by a HW committee with Prem having veto power.

 

I believe their BBM is being given away for free, therefore no revenue.

 

As far as the business goes, they have been on a downward spiral so far but yesterday's earnings puts them in a tailspin.

 

I'll try to write a more detailed post later.

 

I don't own BBRY, but after reading the report yesterday, I'm not sure how anyone can write off BBRY after one quarter's worth of data.  They are in tough to be sure, and the outcome is unlikely to be good relative to the competition's size and dominance, but I think you need to look at least a year's worth of data, sales, and development to come to any accurate conclusion about whether this attempt at a turnaround will be successful or not.  Those that are always "certain" tend to be oblivious to life's uncertainties!  Cheers!

 

1, This is not unexpected information, we have been watching this stock for years.

2, It is not just this quarters numbers, they have forecast an operating loss for next quarter.

3, They will no longer be releasing subscriber numbers which means those numbers will continue to decline.

4, It is on enough just to look at numbers for a year, it is important to understand what those numbers mean.

5, You can always tell who is "certain" by the amount of predictions they make.

[One World Trader]

Here is an article that speaks to the valuation in dollars of BBRY with 0 percent growth looking forward, which depending on it's patent value, could have Mr. Market confused and underestimating BBRY value by 3 dollars. Interesting! Maybe Prem might take the business private, it generates hundreds of millions in cash (though steadily declining at the moment) each quarter.

 

Good call on the BBM cost, future advertising deals maybe?

 

http://m.barrons.com/articles/a/SB50001424052748704382404578565453982736218?mg=reno-barrons

[Parsad]

As I understand it, investment decisions are made by a HW committee with Prem having veto power.

 

I believe their BBM is being given away for free, therefore no revenue.

 

As far as the business goes, they have been on a downward spiral so far but yesterday's earnings puts them in a tailspin.

 

I'll try to write a more detailed post later.

 

I don't own BBRY, but after reading the report yesterday, I'm not sure how anyone can write off BBRY after one quarter's worth of data.  They are in tough to be sure, and the outcome is unlikely to be good relative to the competition's size and dominance, but I think you need to look at least a year's worth of data, sales, and development to come to any accurate conclusion about whether this attempt at a turnaround will be successful or not.  Those that are always "certain" tend to be oblivious to life's uncertainties!  Cheers!

 

1, This is not unexpected information, we have been watching this stock for years.

2, It is not just this quarters numbers, they have forecast an operating loss for next quarter.

3, They will no longer be releasing subscriber numbers which means those numbers will continue to decline.

4, It is on enough just to look at numbers for a year, it is important to understand what those numbers mean.

5, You can always tell who is "certain" by the amount of predictions they make.

 

1, Investors have been watching Apple for years, but the last year and a half have not been one of glory...that doesn't mean Apple is finished.

2, They've pretty much scrapped much of the business plan for the past decade, and gone in a completely different direction...it's reasonable to assume that they will go through quarters of losses?

3, Probably because they are trying to focus on the longer term, not quarter by quarter.

4, I doubt if Apple's business plan in the first year Jobs took over the 2nd time around was anything but painful...look what happened there.

5, You are most correct here, and there have been more than enough predictions by pretty much everyone...the Apple thread is pretty much indicative of that!

 

As I mentioned earlier, I don't own BBRY and do own APPL.  But any supposition from a quarter's worth of numbers smack of hubris.  Cheers!

 

[Guest valueInv]

 

1, Investors have been watching Apple for years, but the last year and a half have not been one of glory...that doesn't mean Apple is finished.

And?

 

 

2, They've pretty much scrapped much of the business plan for the past decade, and gone in a completely different direction...it's reasonable to assume that they will go through quarters of losses?

 

What is their new business plan? What is their new direction?

 

 

3, Probably because they are trying to focus on the longer term, not quarter by quarter.

 

So they need to keep investors in the dark and make misleading statements ?

 

4, I doubt if Apple's business plan in the first year Jobs took over the 2nd time around was anything but painful...look what happened there.

 

 

First came the Jellybean iMac, then the Sunflower iMac and then the iPod.

 

With RIM - their first touchscreen phone, then the Playbook and now BB10.

 

Hardly the same.

 

 

5, You are most correct here, and there have been more than enough predictions by pretty much everyone...the Apple thread is pretty much indicative of that!

Yup, the Apple thread has been far better than the RIM thread at predicting.

 

As I mentioned earlier, I don't own BBRY and do own APPL.  But any supposition from a quarter's worth of numbers smack of hubris.  Cheers!

 

We are looking at s lot more than a quarter's worth of numbers.

[txlaw]

Open discussion - does Prem See something in Blackberry that we do not? Year over year losses have declined, however since sales did not meet expectations and Mr. Market has decided to lower BBRY by 27 percent today, does this mean it is not a solid business model? They have announced this week possibly to a change in strategy from hardware to software stating that they have been approved and are going to sell Blackberry Messenger on Apple and Android smartphones as a more steady source of income, what does the board's research show of the strengths/ weaknesses of BBRY moving forward?

 

See the RIM thread: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/rim-research-in-motion/2050/ .  There is a lot of discussion there about BBRY's business prospects, strategy, and asset value. 

 

As to HWIC and BBRY, I will provide some input re: Mr. Watsa's involvement.  Keep in mind that I'm  making an educated guess as to the HWIC decision process on BBRY -- I'm not certain, and I doubt we will get a straight answer from those guys re: RIM/BBRY anytime soon, if ever.

 

---------

 

So, first, note that Prem Watsa is the ninth chancellor of the University of Waterloo.  Mike Lazaridis, RIM co-founder, was the eight chancellor.

 

Mike Lazaridis 2003–2009

Prem Watsa 2009–present

 

Second, note that Prem Watsa has called Mike Lazaridis a genius.  Mr. Watsa wouldn't say this if he hadn't had discussions with Lazaridis and actually believed this.  (And, frankly, Watsa is completely right on this account.  Lazaridis is clearly a very smart guy -- anyone who says otherwise hasn't done research on him and doesn't really know what they're talking about.)

 

Third, note that FFH only started to buy RIM shares after RIM acquired QNX in April 2010. 

 

Fourth, note that Lazaridis recently stated that his biggest regret was that he hadn't bought QNX sooner.

 

Based on the above, I believe that Mr. Watsa and Mr. Lazaridis likely had discussions in the past about strategy in the tech world and the future of "mobile computing."  And they quite possibly had these discussions prior to HWIC's buying up RIM shares.  I wouldn't be surprised (again, this is an educated guess) if they had discussed the commoditization of the OS and the need to switch business models from selling devices (really, selling an OS license that is embedded into the cost of the device) to selling software and services.  This would be something that the C-Suite at RIM would be aware of when they acquired QNX, as 2010 was the year when Android really began to hit its stride.

 

So when RIM bought QNX, it likely became clear to Mr. Watsa that RIM was executing on this business model transition, with Lazaridis preparing RIM for a time when their OS (QNX and a BB OS built on top of QNX) could run on a myriad of devices and things (think, M2M and IoT) and RIM could provider software and services tied to this.  And that's probably why HWIC started accumulating RIM shares.

 

Now, here's where I think HWIC may have made a mistake with RIM/BBRY.  I suspect they put a much higher value on the patents than the market (Francis Chou apparently has stated that BBRY's patents are worth $15 a share).  And then I think they underestimated how quickly BBRY could lose market share and go from minting money to losing it or breaking even.  (A lot of people made the same mistake with NOK.)  So, IMO, they paid too much for their shares and didn't have enough of an MOS, at least initially. 

 

But I think HWIC probably believes that the strategy that BBRY is pursuing is the correct one. 

[Guest wellmont]

 

See the RIM thread: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/rim-research-in-motion/2050/ .  There is a lot of discussion there about BBRY's business prospects, strategy, and asset value. 

 

As to HWIC and BBRY, I will provide some input re: Mr. Watsa's involvement.  Keep in mind that I'm  making an educated guess as to the HWIC decision process on BBRY -- I'm not certain, and I doubt we will get a straight answer from those guys re: RIM/BBRY anytime soon, if ever.

 

---------

 

So, first, note that Prem Watsa is the ninth chancellor of the University of Waterloo.  Mike Lazaridis, RIM co-founder, was the eight chancellor.

 

Mike Lazaridis 2003–2009

Prem Watsa 2009–present

 

Second, note that Prem Watsa has called Mike Lazaridis a genius.  Mr. Watsa wouldn't say this if he hadn't had discussions with Lazaridis and actually believed this.  (And, frankly, Watsa is completely right on this account.  Lazaridis is clearly a very smart guy -- anyone who says otherwise hasn't done research on him and doesn't really know what they're talking about.)

 

Third, note that FFH only started to buy RIM shares after RIM acquired QNX in April 2010. 

 

Fourth, note that Lazaridis recently stated that his biggest regret was that he hadn't bought QNX sooner.

 

Based on the above, I believe that Mr. Watsa and Mr. Lazaridis likely had discussions in the past about strategy in the tech world and the future of "mobile computing."  And they quite possibly had these discussions prior to HWIC's buying up RIM shares.  I wouldn't be surprised (again, this is an educated guess) if they had discussed the commoditization of the OS and the need to switch business models from selling devices (really, selling an OS license that is embedded into the cost of the device) to selling software and services.  This would be something that the C-Suite at RIM would be aware of when they acquired QNX, as 2010 was the year when Android really began to hit its stride.

 

So when RIM bought QNX, it likely became clear to Mr. Watsa that RIM was executing on this business model transition, with Lazaridis preparing RIM for a time when their OS (QNX and a BB OS built on top of QNX) could run on a myriad of devices and things (think, M2M and IoT) and RIM could provider software and services tied to this.  And that's probably why HWIC started accumulating RIM shares.

 

Now, here's where I think HWIC may have made a mistake with RIM/BBRY.  I suspect they put a much higher value on the patents than the market (Francis Chou apparently has stated that BBRY's patents are worth $15 a share).  And then I think they underestimated how quickly BBRY could lose market share and go from minting money to losing it or breaking even.  (A lot of people made the same mistake with NOK.)  So, IMO, they paid too much for their shares and didn't have enough of an MOS, at least initially. 

 

But I think HWIC probably believes that the strategy that BBRY is pursuing is the correct one.

 

he may be a genius, and I am not denying he is. But he totally missed where mobile devices were headed. he correctly foresaw that people would use them as email and messaging clients. but he did not pivot when apple released the first iphone. instead of deriding it as misguided flop, he should have been hard at work transitioning rimm from a company that sold a phone that did email and messaging, to one that could do what the iphone could do. ml was also championing an idea that bandwidth would be scarce, and positioned his company accordingly with weird tweaks to the OS. but what happened was that bandwidth capacity exploded with the advent of LTE, which rimm also missed. rimm took years before they realized that Jobs had the correct vision, and that LTE was enabling rich access devices. by then they were well behind the competition, which had expanded to include Samsung and Google.

 

As for PW, he got involved when rimm was still making very good money; at a time the markets became skeptical about it's future earnings power. Investors put a low p/e ratio on current earnings. Both CEOs were large sellers of stock through 2007. ml probably told his friend the future of rimm was very "bright".  so pw plunged in when he thought he was buying a growth stock at a utility multiple. This of course was the wrong way to look at rimm back in 2010.

 

Now he is simply trying to salvage an investment that was initially made with the wrong thesis. He is doing that by averaging down and getting some control over what happens to rimm. this is why the thesis has shifted and now is all about the residual value of the patents, services business etc. But lets not kid ourselves. The genius built this company, but is partly responsible for where it is today.

[Guest valueInv]

So when RIM bought QNX, it likely became clear to Mr. Watsa that RIM was executing on this business model transition, with Lazaridis preparing RIM for a time when their OS (QNX and a BB OS built on top of QNX) could run on a myriad of devices and things (think, M2M and IoT) and RIM could provider software and services tied to this.  And that's probably why HWIC started accumulating RIM shares.

 

So essentially the thesis is that RIM will build completely new businesses in new emerging markets on the ashes of its old business. That is a venture investment, not a value investment. No one knows who is going to get what marketshare, how big the market is, what pricing is, what the margins are and even what part of the value chain is going to succeed in value capture. In fact, this could turn out to be something like nanotechnology and clean energy - lots of potential and hype but few business successes. This is the area where venture capitalists play.

 

Note: IoT and M2M are two different things. IoT devices use a lot of different technologies to communicate including WiFi and Zigbee. M2M is a small subset of IoT. M2M is expected to comprise of only about 5% of traffic by 2017 (and that is from a source that is known to be overoptimistic about traffic projections).

[txlaw]

So when RIM bought QNX, it likely became clear to Mr. Watsa that RIM was executing on this business model transition, with Lazaridis preparing RIM for a time when their OS (QNX and a BB OS built on top of QNX) could run on a myriad of devices and things (think, M2M and IoT) and RIM could provider software and services tied to this.  And that's probably why HWIC started accumulating RIM shares.

 

So essentially the thesis is that RIM will build completely new businesses in new emerging markets on the ashes of its old business. That is a venture investment, not a value investment. No one knows who is going to get what marketshare, how big the market is, what pricing is, what the margins are and even what part of the value chain is going to succeed in value capture. In fact, this could turn out to be something like nanotechnology and clean energy - lots of potential and hype but few business successes. This is the area where venture capitalists play.

 

Note: IoT and M2M are two different things. IoT devices use a lot of different technologies to communicate including WiFi and Zigbee. M2M is a small subset of IoT. M2M is expected to comprise of only about 5% of traffic by 2017 (and that is from a source that is known to be overoptimistic about traffic projections).

 

No, this is isn't a "venture investment."  The beauty of this "value investment" is that you're getting all this potential going concern upside for next to nothing.  You already have a break-up/run-off value that you can estimate (think, "resource conversion" value), and the sale of BBRY devices is funding the creation of these new businesses.  The key to BBRY being an outstanding investment will be whether or not they get a return on their investments -- which is why we need to see whether their existing customers will adopt their new software/services and whether QNX will be more widely adopted (in its different forms -- BB10, QNX Car, etc.) as we see IoT and M2M become a reality.

 

The approach is not unlike what a Jana Partners would have seen in BKS prior to John Malone making an investment.  This is a value approach -- not a venture approach.

 

Or to put it a different way:

 

]I've had many friends in the sick business fixup game over a long lifetime. And they practically all use the following formula—I call it the cancer surgery formula:

 

They look at this mess. And they figure out if there's anything sound left that can live on its own if they cut away everything else. And if they find anything sound, they just cut away everything else. Of course, if that doesn't work, they liquidate the business. But it frequently does work.

 

-Charlie Munger, A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business, USC Business School, 1994

http://ycombinator.com/munger.html

[txlaw]

he may be a genius, and I am not denying he is. But he totally missed where mobile devices were headed. he correctly foresaw that people would use them as email and messaging clients. but he did not pivot when apple released the first iphone. instead of deriding it as misguided flop, he should have been hard at work transitioning rimm from a company that sold a phone that did email and messaging, to one that could do what the iphone could do. ml was also championing an idea that bandwidth would be scarce, and positioned his company accordingly with weird tweaks to the OS. but what happened was that bandwidth capacity exploded with the advent of LTE, which rimm also missed. rimm took years before they realized that Jobs had the correct vision, and that LTE was enabling rich access devices. by then they were well behind the competition, which had expanded to include Samsung and Google.

 

As for PW, he got involved when rimm was still making very good money; at a time the markets became skeptical about it's future earnings power. Investors put a low p/e ratio on current earnings. Both CEOs were large sellers of stock through 2007. ml probably told his friend the future of rimm was very "bright".  so pw plunged in when he thought he was buying a growth stock at a utility multiple. This of course was the wrong way to look at rimm back in 2010.

 

Now he is simply trying to salvage an investment that was initially made with the wrong thesis. He is doing that by averaging down and getting some control over what happens to rimm. this is why the thesis has shifted and now is all about the residual value of the patents, services business etc. But lets not kid ourselves. The genius built this company, but is partly responsible for where it is today.

 

Yup, there were definitely blind spots there, and Lazaridis definitely is partly responsible for where BBRY is today. 

 

But it's the tech world -- we have to cut Lazaridis some slack.  Not everyone is Steve Jobs.  Not even Steve Jobs!

 

As to Mr. Watsa, I sincerely doubt that he thought he was buying a technology growth stock at a low multiple.  HWIC tends to be an asset-oriented investor, more like Ben Graham and Martin Whitman, and less like WEB. 

 

That's why I think the problem was likely that they overestimated the value of the patents, as well as the cash in-flow that would be coming from the legacy device sale business model.  Essentially, they were too optimistic on the liquidation/run-off value for BBRY.

 

Not unlike, say, an ESL with SHLD.

[Guest wellmont]

We can agree to disagree on this one.

 

He started buying in the mid $40s. the stock is now $10 and got as low as $6. When he bought, the stock was making very good money and selling at a very low p/e. Today it is losing money. When growth stocks that were making big money start to lose money, the stock price collapses, which is exactly what happened here.

 

Buying at $40+, I doubt he ever thought rimm would lose money. If you go back and read the thread on rimm here at the time, all the talk was how this great and growing company was selling at 8x earnings and what a gift it was. None of the bulls ever thought it could lose money.

 

I don't think you can chalk the magnitude of this kind of valuation gap ($45 - $10) to a misjudgment on the value of patents. I believe it was a wrong thesis. When you say he miscalculated the cash coming in from legacy device business, what you are actually saying imo, is he did not think this company was going to ever lose money on devices. So he was making an earnings bet, not an asset bet.

 

I don't think he's primarily an asset investor at all. He's a very good opportunistic investor, which would include buying good growing businesses at low multiples, especially if they are run by your friends. He's a macro investor. He's a market timer. he shorts stuff. that kind of investing is very different from hard asset investing, which he also does.  the lesson here is that even great investors are capable of making mistakes. The trick is limiting the damage, which he appears to be doing very well.

[Guest valueInv]

So when RIM bought QNX, it likely became clear to Mr. Watsa that RIM was executing on this business model transition, with Lazaridis preparing RIM for a time when their OS (QNX and a BB OS built on top of QNX) could run on a myriad of devices and things (think, M2M and IoT) and RIM could provider software and services tied to this.  And that's probably why HWIC started accumulating RIM shares.

 

So essentially the thesis is that RIM will build completely new businesses in new emerging markets on the ashes of its old business. That is a venture investment, not a value investment. No one knows who is going to get what marketshare, how big the market is, what pricing is, what the margins are and even what part of the value chain is going to succeed in value capture. In fact, this could turn out to be something like nanotechnology and clean energy - lots of potential and hype but few business successes. This is the area where venture capitalists play.

 

Note: IoT and M2M are two different things. IoT devices use a lot of different technologies to communicate including WiFi and Zigbee. M2M is a small subset of IoT. M2M is expected to comprise of only about 5% of traffic by 2017 (and that is from a source that is known to be overoptimistic about traffic projections).

 

No, this is isn't a "venture investment."  The beauty of this "value investment" is that you're getting all this potential going concern upside for next to nothing.  You already have a break-up/run-off value that you can estimate (think, "resource conversion" value), and the sale of BBRY devices is funding the creation of these new businesses.  The key to BBRY being an outstanding investment will be whether or not they get a return on their investments -- which is why we need to see whether their existing customers will adopt their new software/services and whether QNX will be more widely adopted (in its different forms -- BB10, QNX Car, etc.) as we see IoT and M2M become a reality.

 

The approach is not unlike what a Jana Partners would have seen in BKS prior to John Malone making an investment.  This is a value approach -- not a venture approach.

 

Or to put it a different way:

 

]I've had many friends in the sick business fixup game over a long lifetime. And they practically all use the following formula—I call it the cancer surgery formula:

 

They look at this mess. And they figure out if there's anything sound left that can live on its own if they cut away everything else. And if they find anything sound, they just cut away everything else. Of course, if that doesn't work, they liquidate the business. But it frequently does work.

 

-Charlie Munger, A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business, USC Business School, 1994

http://ycombinator.com/munger.html

 

Notice rhat Munger is not talking about growing or entering new businesses, he is talking about cutting away cancer. BBRY has not cut its device business but instead invested more and they have promised more new exciting devices coming this year. Also, note that their device business is losing money, they have warned of an operating loss next quarter.

[Guest wellmont]

the only thing bbry has cut is people. they have not exited any businesses. the Munger analogy would make sense if bbry exited devices and focused on software and services.

[txlaw]

I agree that the situation is not quite the same as what Munger is talking about because in BBRY's case, the prognosis is actually better than what Munger is describing.  The existing business (selling BB devices), which is becoming much less relevant, is being used to help grow the value of the more valuable biz/asset.  There isn't really a "cancer" that needs to be cut away in this case.

 

The point I was trying to make is that there is often a very solid business or business asset hidden within what appears to be a "dying" business.  Often, this hidden business or asset can grow in value through maintenance of the "dying" business.  That is the process of transformation that consistently happens over and over again in the business world -- and especially in the tech world.  You utilize the assets you have to grow new businesses (or new business models).

 

DELL is an example of a tech biz in transformation.  The PC is a "dying" business.  Yet, the business infrastructure that DELL has in place, which is fundamental to growth side of the biz, is best maintained and optimized by keeping the PC biz and optimizing for cash flow, rather than selling a la IBM.

 

Similarly, BBRY will best be able to maintain and (hopefully) grow the value of its assets by pushing forward with BB10 and keeping in place as many relationships with IT departments, C-Suites,  governments, and even consumers as it can.  Hopefully, this will make QNX and the software and services portfolio more valuable over the long run. 

 

As to operating losses, sometimes you deal with accounting losses to grow your business.  Amazon created a lot of value by running its business at losses/breaking even when it first started.  Bezos now has a fantastic company that has a nice moat around it.  Sandridge Energy, despite generating accounting losses, is generating value when it invests the cash it generates into high return rock.  GOOG's Android biz line would probably appear to be generating operating losses if GOOG broke those figures out separately.  But GOOG has actually made more money because of Android.

[Guest valueInv]

So what you're saying is that N operating loss is an accounting loss and not a real loss ie it still results in positive cashflow?

[txlaw]

So what you're saying is that N operating loss is an accounting loss and not a real loss ie it still results in positive cashflow?

 

What I'm trying to say is that an accounting loss, whether it is an operating loss or a pre-tax loss or an after-tax loss isn't necessarily a destruction of value.  Same with a break-even or negative FCF situation.

 

Sandridge generates a GAAP loss, but some amount of expenses in the P&L, and capex in the CF statement, is actually investment spending that is generating a return.  IV is actually growing because there is a return on investment there.  Sandridge could probably generate free cash flow if it began to shrink.  But that wouldn't be a good idea.

 

Level 3 continues to generate a GAAP loss because of the huge capex it has made in the past, but that money was spent in anticipation of returns, and in reality, that company is generating economic profits and generating high returns on incremental growth capital, which makes a up a large percentage of capex.

 

As far as we know, if GOOG were required to break out the Android "business" into separate accounts, it would like it is just breaking even or is minimally profitable.  But the reality is that GOOG makes so much more money in its core business now because of all the money it has spent on Android. 

 

So you can operate a business (or business line) at break even, or even at a loss (from an accounting perspective), and still be generating economic value.  The assumption, however, is that the money that is being spent is going to generate a return.

 

On the CC, Blackberry management noted, for example, that sales and marketing expenses will be  ramped up.  That will help cause the anticipated operating loss next quarter.  We also saw that they will continue to use at least $1.3 billion annually for intangible asset purchases and capex, which will eat into operating cash flow and actually cause cash burn.  But they're anticipating a return on those expenditures, which is necessary to get more BB10 devices out there and to build their mobile services platform.  If the mobile services platform has value, then it makes sense for them to generate the operating loss in the short term.

 

That's all I'm saying.

[Parsad]

We can agree to disagree on this one.

 

He started buying in the mid $40s. the stock is now $10 and got as low as $6. When he bought, the stock was making very good money and selling at a very low p/e. Today it is losing money. When growth stocks that were making big money start to lose money, the stock price collapses, which is exactly what happened here.

 

Buying at $40+, I doubt he ever thought rimm would lose money. If you go back and read the thread on rimm here at the time, all the talk was how this great and growing company was selling at 8x earnings and what a gift it was. None of the bulls ever thought it could lose money.

 

I don't think you can chalk the magnitude of this kind of valuation gap ($45 - $10) to a misjudgment on the value of patents. I believe it was a wrong thesis. When you say he miscalculated the cash coming in from legacy device business, what you are actually saying imo, is he did not think this company was going to ever lose money on devices. So he was making an earnings bet, not an asset bet.

 

I don't think he's primarily an asset investor at all. He's a very good opportunistic investor, which would include buying good growing businesses at low multiples, especially if they are run by your friends. He's a macro investor. He's a market timer. he shorts stuff. that kind of investing is very different from hard asset investing, which he also does.  the lesson here is that even great investors are capable of making mistakes. The trick is limiting the damage, which he appears to be doing very well.

 

You would be correct on all of these comments.  You would also have to admit that the value proposition certainly changed once the company's market capitalization went down below the net cash on the books. 

 

I don't dispute that businesses like DELL and BBRY are in for very difficult times from their competition...I just disagree about when an investment can be appealing, regardless of the long-term disaster that may await it.  Price is everything and Prem got the price wrong on BBRY.  Doesn't mean it isn't a good investment at a certain price.  Cheers!

[Guest wellmont]

if I was going to invest in bbry I would wait until they throw in the towel on bb10, which I believe is inevtiable. after that then the Munger quote Will apply to this situation. cheers.

 

You would be correct on all of these comments.  You would also have to admit that the value proposition certainly changed once the company's market capitalization went down below the net cash on the books. 

 

I don't dispute that businesses like DELL and BBRY are in for very difficult times from their competition...I just disagree about when an investment can be appealing, regardless of the long-term disaster that may await it.  Price is everything and Prem got the price wrong on BBRY.  Doesn't mean it isn't a good investment at a certain price.  Cheers!

[Lotsofcoke]

Market Share: from 50% to > 1%. Nuff. said.

[One World Trader]

Would you consider then lotsofcoke that they have nowhere to go but up? I can think of a number of apple products that flopped in the 90s before that technology business turned profitable. :) Like apple, they were profitable before the decline.

[BargainValueHunter]

Shares halted...

 

Big announcement forthcoming...

 

http://www.marketwatch.com/story/blackberry-says-exploring-strategic-alternatives-2013-08-12-8911652

 

Prem Watsa, chairman and CEO of Fairfax Financial, said he will resign because of potential conflicts that may arise during the process. Fairfax Financial is the largest BlackBerry shareholder. "I continue to be a strong supporter of the Company, the Board and Management as they move forward during this process, and Fairfax Financial has no current intention of selling its shares," Watsa added in a statement released by BlackBerry. J.P Morgan Chase & Co. is serving as financial advisor to BlackBerry and Skadden, Arps, Slate, Meagher & Flom LLP and Torys LLP are serving as legal advisers.

[JRH]

Shares halted...

 

Big announcement forthcoming...

 

http://www.marketwatch.com/story/blackberry-says-exploring-strategic-alternatives-2013-08-12-8911652

 

Prem Watsa, chairman and CEO of Fairfax Financial, said he will resign because of potential conflicts that may arise during the process.

 

WOW... What price do you think Fairfax will end up offering?

 

Talk about telegraphing intentions.

 

Edit: I only slightly kid.