Saying it is better late than never is cliché, so when BlackBerry Ltd (NASDAQ:BBRY) announced it would license BBM, the news was met with yawns. The stock moved a bit over 4% on the week. Still, BBRY’s march away from hardware devices and towards software sales will pay off. And with potential earnings growth of 31.6% next year (per Finviz), BBRY may make a run back to $8 a share.
Nokia Corp (ADR) (NYSE:NOK), BlackBerry’s former rival, trades at a price-to-sales ratio of 1.11. But the network supplier relies on hardware sales for revenue growth. BlackBerry’s 2.6x P/S ratio has room to expand, which implies a stock price of $8 a share, if it succeeds in licensing its legacy solutions.
BBRY’s COO said:
“We are constantly innovating and looking for ways to leverage our legacy and expertise in secure mobility to solve real business problems.”
BBRY Monetizing Messaging … How?
BlackBerry thinks its messaging solution, BBM Enterprise software development kit (SDK), will attract developers despite the market already being saturated with IM apps. Snapchat is about to IPO at a $25 billion market cap. This makes Snapchat roughly six times bigger than BlackBerry.
In China, WeChat dominates the market. Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) supports Hangouts while Microsoft Corporation (NASDAQ:MSFT) offers Skype for consumers and for businesses. BBM’s voice, video and messaging is not a unique offering. Only its top level of security may set the SDK apart from the others.
The SDK cuts development time and promises to speed up bringing a messaging product to market. Building on the platform is also cheap: BlackBerry is using a subscription-licensing model.
BlackBerry Hardware Not Forgotten: $1 Revenue
Unsurprisingly, BlackBerry continued outsourcing its hardware development. On Feb. 6, the company said it would allow third-party makers to manufacture handsets in India and the vicinity. The company will make just $1 per unit, which adds only $7 million a quarter for the company.
North America is clearly the most profitable market for handset suppliers. BlackBerry needs TCL — which bought most of the global rights to make BlackBerry handsets in 2016 — to more aggressively market and to promote the DTEK50, DTEK60 and upcoming DTEK70 devices in this region. Not only will that translate to higher licensing revenue, but it indirectly promotes BlackBerry’s enterprise mobility solutions. Companies need MDM (mobile device management), enterprise apps from Good Technology, and Workspaces for BYOD (bring your own device) customers.
Valuation of BlackBerry Stock
Per finbox.io, “the basic philosophy behind a DCF analysis is that the fair value a company is equal to the future cash flows of the company, discounted back to present value.”
Assuming revenue falls in fiscal year 2017 by 25% and drops 10% in FY2018, followed by 5% growth between 2019 and 2021, BBRY stock has a fair value of about $8 a share:
| Input Projections | ||||||
| Fiscal Years Ending | Feb-16 | Feb-17 | Feb-18 | Feb-19 | Feb-20 | Feb-21 |
| Revenue | 2,160 | 1,620 | 1,458 | 1,531 | 1,607 | 1,688 |
| % Growth | -35.2% | -25% | -10% | 5% | 5% | 5% |
| EBITDA | 665 | 204 | 220 | 351 | 369 | 387 |
| % of Revenue | 30.8% | 12.6% | 15.1% | 23% | 23% | 23% |
Source: finbox.io (click here to access model)
Takeaway on BBRY Stock
BlackBerry is an out-of-favor stock whose transition to software will take at least one or two fiscal years to complete.
As the company reports positive cash flow quarter after quarter, the stock will move towards the $8 price target.
As of this writing, Chris Lau held a long position in BBRY stock.
