We have come around a little on BlackBerry (BBRY) since the last time we wrote about the company. In August 2013, we recommended that traders short the stock on the rumor that it was going to be acquired or taken private. By December 2013, the stock had lost 50% of its value and seemed unlikely to recover, but it has since been showing signs of life.
Will BlackBerry ever be able to compete with Apple (AAPL) or Samsung in the handset business? It seems unlikely, but it does not seem improbable for management to improve from where they are now. The hurdle for handset sales and services revenue to flatten out the decline isn’t that high. Considering the cost cutting that turnaround-CEO, John Chen, has implemented; a surprisingly low loss this quarter seems likely.
Unlike Palm, BlackBerry, has retained some market-share and competitive advantages after the smartphone handset revolution. It is possible that the company may be able to start competing again. BBRY has a corner on the market when it comes to security and now that users can install Android apps without command-line access, the app store disadvantage isn’t as significant.
BlackBerry is still projecting a return to being cash flow positive by March 2015, and the CEO has increased the company’s odds of survival from 50:50 (in November 2013) to 80:20 (May 2014). Those numbers are subjective but Chen has some well-deserved street cred after turning Sybase from a perennial loser into a multi-billion dollar acquisition target. If this quarter’s report moves BBRY closer to being an attractive takeover target, the upside could be very large.
Option traders are already signaling confidence in the company with open interest in short term calls outpacing puts by nearly 4:1. We can’t say absolutely that those calls were all opened as long positions, but the majority were opened at the ask price, which is a pretty good indicator that these traders are expecting a rally.
From a technical perspective, BBRY has formed a potential short term double-bottom reversal signal. The initial price-target based on the depth of the pattern is about $9 per share, which would line up with former support from the first quarter this year. Although the initial target is a little tight, a big surprise during the earnings call could sent the stock back up toward $11 in the short term.
It would be a mistake to judge the stock’s potential from this earnings report too negatively or too positively based on the numbers themselves. It’s a certainty that the firm will still report a loss, and another reduction in units sold isn’t out of the question either. What traders really care about at this point are future plans and forward-looking statements.
In our opinion there are two things investors should watch for in this report that would send the stock significantly higher.
1. Cash flow is king.
BlackBerry may still be caught in the death spiral of issuing debt to pay for negative free cash flow. As we already mentioned, the prospective forecast for turning cash flow positive is the first quarter of 2015. However, if that timeline is accelerated to 2014 or the language used for how positive cash flow will be in 2015 is more positive, the reaction in the price would be dramatic.
2. Services vs. hardware
BlackBerry is more than just a handset manufacturer. The revenue from services and software is a much larger percentage of the total revenue mix, and that is good news for margins. All revenue categories are shrinking, but if management can convince investors that the services turnaround is working, the stock will likely appreciate.
BlackBerry’s fundamentals are poor, so don’t expect much from the actual numbers. However, management has a shot at creating some enthusiasm for the future, which could squeeze the 32% short float into some short term gains at a minimum. Turnarounds are risky and BBRY is no exception, but we feel that the potential for upside on optimistic forward looking statements is enough to justify the risk. Even if we are right, we would still recommend keeping this trade on a tight leash.
John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today.
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