Why the BlackBerry Ltd (BBRY) Stock Turnaround Isn’t Coming

Advertisement

We’re somewhere around the 7- or 8-year mark on the turnaround story for BlackBerry Ltd (NASDAQ:BBRY) stock. Within that story, there have been a number of supposed catalysts for BBRY stock. First, the company’s hardware was going to reverse market share losses to Apple Inc. (NASDAQ:AAPL) and the Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) Android ecosystem.

Why the BlackBerry Ltd (BBRY) Stock Turnaround Isn't Coming

That didn’t work; however, BlackBerry’s smartphone market share went from 43% in January 2010 to the single digits in a matter of years. And BlackBerry stock, in turn, dropped from $130+ to the single digits over roughly the same time frame.

After that, there was the balance sheet: BBRY had over $3 billion in cash and no debt just a few years ago. That, bulls argued, made BlackBerry stock “too cheap”.

The company closed its fiscal Q3 (ending November 2016) with just $1 billion in net cash, however. Then, BlackBerry was going to monetize its patents. Other than a $115 million sale in 2015, patent monetization has done little to help BBRY stock. Now, BlackBerry is a software company, working with Ford Motor Company (NYSE:F) to create autonomous cars.

None of the stories have done much for BBRY stock so far. And there’s little reason to expect a change.

BlackBerry Stock Isn’t ‘Cheap’

The issue with BBRY stock at the moment is that it needs a turnaround at this point. The company does have net cash of about $1 billion. But it’s also barely profitable on an adjusted basis. Guidance for Q4 fiscal 2017 (ending February) suggests full-year adjusted earnings-per-share of just $0.02. Adjusted EBITDA likely will come in around $200 million … at most.

Even backing out the company’s cash, those figures value BlackBerry stock at about 250x EPS and 20x adjusted EBITDA. Both numbers imply that investors buying BBRY stock are expecting near-term growth. But the question remains: from where will that growth come?

Hardware Licensing Won’t Turn Around BBRY Stock

Much of the year-over-year improvement in FY17 is coming from cost-cutting, notably from the decision to exit handset manufacturing. But that can’t be replicated every year, even if BBRY should see incremental benefits in FY18. Longer-term, BlackBerry touts the margin enhancements associated with those moves. But they also cut revenue substantially: hardware revenue (the company’s “Mobility Solutions” segment) is down by more than half through the first three quarters of FY17, and will continue to decline.

As far as licensing goes, it’s true that gross margin and operating margin will rise. In fact, BBRY has estimated ~90% gross margin on its licensed products. But gross profit dollars decline. Some sort of profit needs to be left over for key licensor TCL to make the deal.

That doesn’t mean licensing out phones is a bad deal for BlackBerry. There are better uses for the company’s capital. But BBRY’s overall hardware profits only rise if its hardware sales rise — and that seems highly unlikely. The company still has to design those phones; and its design history is checkered with failure. The Classic and the Priv both disappointed tremendously. BlackBerry had to take an inventory write-down charge on both the DTEK50 and DTEK60 models launched more recently.

Low-cost outsourcing helps margins. But it’s not going to drive BBRY’s overall EPS higher, even if margins and ROIC improve.

So What Does Drive BBBRY Stock Higher?

BlackBerry itself now says it’s a software company, not a hardware company. But that’s not necessarily the right answer. Bulls — and BBRY management — tout QNX as some sort of game-changer. But that platform has been a pillar of the bull case since BlackBerry (then known as Research in Motion) acquired the product from Harman International Industries Inc (NYSE:HAR) in 2010. And while the software does have an inroad with Ford — powering the company’s ‘SYNC’ infotainment offering — it has hardly been a profit driver.

BlackBerry stock still has an enterprise value of $2.6 billion. QNX alone doesn’t support that. Hardware licensing of phones that simply don’t have a widespread audience doesn’t support that value, either. Approximately $150 million in patent monetization is a drop in the bucket.

The new “BlackBerry Secure” platform sounds like a driver, but cybersecurity hasn’t exactly been a great industry for investor capital of late. (See FireEye Inc (NASDAQ:FEYE), among other stocks.) And BBRY has been touting its edge in enterprise security for years now. But its hardware business was usurped by the BYOD (“Bring Your Own Device”) trend, and the company simply hasn’t caught up.

From a broad standpoint, there’s simply nothing really new in the BlackBerry turnaround. QNX is a flexible piece of software, but there’s no reason to see it as even a billion-dollar product. (BlackBerry acquired it for just $200 million.) BlackBerry Secure is a new name for the same failed argument that the company can make money as a security “leader”.

A new focus on U.S. government revenue isn’t new: that was one of the company’s few footholds as its handset business collapsed. And the same execution issues that have dogged the company for nearly a decade don’t seem to be fixed.

All told, there isn’t a real base for a turnaround in BlackBerry stock. And that has been the case for years now. Meanwhile, BBRY stock is threatening to hit a 14-year low. At this point, it’s time to move on.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/blackberry-ltd-bbry-stock-turnaround-isnt-coming/.

©2024 InvestorPlace Media, LLC