BlackBerry’s (BBRY) latest quarter was bad in just about every area. The company missed EPS expectations, and its $490 million in revenue was about $120 million less than analysts were expecting.
The company sold just 800,000 smartphones and its combined software/service revenue of $284 million is hardly competitive with the big boys of tech.
But while BBRY stock may seem like an obvious “sell”, there is a silver lining, and three specific reasons that now is a good time to take a bet on BBRY.
The Priv!
BlackBerry has had some pretty cool hardware over the years; most recently I liked the PassPort’s square shape for reading and creatings docs and emails. However, there was one big problem: The Passport ran on BlackBerry’s outdated operating system that lacked updated applications compared to the more popular Android Play and iOS.
That’s what makes the Priv smartphone so compelling. It has all the security features that BlackBerry users have come to expect, along with a great hardware design, but replaces its old operating system with Google Play’s 1.5 million applications. This could be a game-changer for BBRY stock, which has fallen 87% over the last five years due to lost market share in the smartphone arena.
While I’m not suggesting that BlackBerry will be competitive with the iPhone or Galaxy, the good news is that BBRY doesn’t need to sell too many phones to drive BBRY stock price higher.
If BBRY can sell just 3 million units at $600 with a 25% margin, that’s $1.8 billion in revenue and $450 million of operating income. That would represent a 90% increase to expected revenue for 2015 and a significant boost to BBRY’s existing -3.8% operating margin. In essence, BBRY’s Priv is the big catalyst, and one that I think could well exceed the hype.
BBRY Stock Is Cheap
If the Priv performs well, it will drive BBRY stock significantly higher. It may even lead to triple-digit gains. However, even if it turns out to be a clunker, BBRY stock doesn’t have much downside. BBRY is so cheap right now, there’s not much room for additional declines.
With nearly $700 million in trailing 12-month free cash flow, BBRY trades at roughly 5.5x trailing-12-month free cash flow. Given that the Priv is priced as a premium product, it will provide a boost to margins and FCF regardless of whether it sells 2 million or 5 million units. Thus, BBRY stock is already cheap, and is only going to get cheaper as margins and FCF start to rise.
BBRY Finally Has the Right Idea
For the past year, BBRY investors have argued that the sum of BlackBerry’s parts are worth much more than its valuation. For the most part, they’re right.
BBRY has a patent portfolio worth billions, operations that are cash flow positive with $2 billion in revenue so far in 2015, and more than $2 billion in net cash. Therefore, the BBRY stock price looks cheap at a market capitalization of just $4 billion.
So, when your stock price is very cheap, and you’re rich with cash, the best policy is to buy back stock. Last quarter, BBRY spent $47 million to repurchase 6 million shares, and afterwards, management announced a new plan to repurchase 15 million shares. Combined, that’s good for 4% of its shares outstanding, and provides some buying pressure for BBRY stock.
In essence, BlackBerry’s realization of the value in its own stock is yet another reason that investors should bet on BlackBerry.
Bottom Line on BBRY
There was a time not too long ago when BlackBerry CEO John Chen was trying to sell investors on the notion that BBRY was an enterprise company, with 80% of its 50 million customers using their hardware for business. In addition, Chen tried to illustrate why this presence would translate to sustainability, and higher services/software sales.
Ultimately, BBRY’s strategy is to sell hardware, which then feeds into other segments like BlackBerry Messenger and mobile device management, and thereby boosts services/software revenue. The problem is that iOS, Android and even Windows have stolen essentially all of BlackBerry’s market share.
Recently, Tim Cook made a great point when saying that people don’t buy enterprise smartphones any more than they buy enterprise cars. They buy cars and smartphones, plain and simple. BlackBerry’s old strategy was to target “enterprise smartphone” buyers, but as Cook notes, that’s not a real opportunity.
By adopting Google Play, BlackBerry is both consumer and enterprise, and has a better shot to capitalize on the customers who use their devices for both purposes. In other words, if the Priv is successful, it will spill into BBRY’s other businesses, giving BlackBerry a real shot at a comeback.
As of this writing, Brian Nichols was long BBRY.
