BlackBerry (BBRY) is Canada’s largest cell phone maker. That said, the company’s hardware side has seen a precipitous decline in recent years. BBRY stock has plunged with it.
However the company is now refocusing more toward software. And the move from its proprietary platform to Android may help bring back customers who like BlackBerry’s hardware but wanted a broader ecosystem. With the stock again nearing all-time lows here, is there a buy the turnaround argument for BBRY stock?
BlackBerry Stock: Pros
Software: While BlackBerry’s QNX platform never amounted to much in its original phone application, the software system is by no means dead. QNX has turned into a leading ecosystem for automobiles; it’s currently in use in 60 million vehicles. While automobile software/entertainment is still in its early stages, there’s a lot of potential for the same sorts of apps and purchases that are present on the smartphone now. While BBRY has largely lost the cellphone market, they have established a good position in one of the big growth platforms of the future.
Polling shows that there’s great demand for in-car entertainment systems even at high price points. And currently, fewer than 5% of drivers have access to in-car wifi. As this percentage rises, the opportunities to monetize the QNX automobile platform will grow greatly. BlackBerry is already growing the software revenue segment of the business at an aggressive clip, and QNX will continue to be a big part of that in the future. QNX has one other big edge for the car: Customers want a software system that is resistant to hacking and tampering; BlackBerry, for all its fault, still has an excellent reputation in that area.
John Chen: Guiding the turnaround is CEO John Chen. He took the reins in late 2013, and so far it’s been slow going trying to regain traction for BBRY. But don’t count Chen out.
He previously took over at Sybase, which at the time was a slow-growth mature business with a market cap under half a billion. 12 years later, Chen successfully sold Sybase to SAP for $5.8 billion. That’s a huge return, and investors earned 28% a year compounded over that stretch. Chen positioned Sybase into the same sorts of growth verticals toward which BBRY is moving itself now. While investors that wanted instant gratification via a sudden jump in BlackBerry’s stock price have been disappointed with Chen, he’s a proven leader who has the potential to be able to save the company.
Licensing Opportunities: BBRY stock’s best near-term opportunity may come from licensing its IP to third parties. Currently, there’s very little available for Android in the secured OS environment. Aside from PrivatOS, there’s nothing else really competing in the arena.
While the Priv hasn’t been a great success by any means, there’s still plenty of demand for the concept of a more secure version of Android. While it’s sad for BlackBerry to think about, the problem may be with BlackBerry’s hardware instead of the version of its OS. There’s the potential for other OEMs to license BlackBerry’s improved operating system as the base for various products. This would expand BlackBerry’s addressable market without costing the company any significant additional capital expenditures to get up and running.
BlackBerry Stock: Cons
Handsets Continue To Slump: While the pros listed above are great, they miss the biggest point of discussion with BBRY stock. Handset revenues are continuing to crater. Over the past year, average revenue per unit (ARPU) has fallen from almost $300 to under $200. That alone would take a severe toll on revenue. Add in the fact that the number of units sold dropped by almost half, and you’re facing a catastrophic decline of the company’s main business.
The rollout of the Priv was supposed to alter both trends. Two quarters ago, Blackberry’s ARPU ticked up slightly, as customers were drawn to some of the company’s higher-end Android phones. But the initial enthusiasm has faded and both sales and price per unit dropped again in the latest quarter.
BBRY Stock Is Expensive: Even near the lows, BBRY stock is still pricing in a lot to go right. If you changed BlackBerry’s name to some generic software firm, it’s unlikely the market would assign it a $3.8 billion market cap. Revenues were just over $2 billion in the past year, meaning BBRY stock is still trading at 2x sales, which isn’t cheap for an unprofitable and shrinking company.
In 2011, the company did $19 billion in revenues. Since then, revenues have shrunk by almost 90%. Yes, the company has a very nice software business inside of the broader firm, but it simply isn’t large enough to justify the value of Blackberry’s current market capitalization. Turnaround stories can be big winners, but the starting valuation has to price in enough uncertainty so as to offer big rewards is the plan succeeds. In this case, BBRY stock is already priced as if there’s a good shot the new software model will work.
Negative Outlook: BlackBerry’s recent earnings results have mostly been big misses. The Priv didn’t capture the consumer’s attention. Purchase order commitments plunged, suggesting that hardware sales will continue to disappoint throughout 2016. If you buy this stock now, you’re setting yourself up to get reamed every time BlackBerry reports earnings for the rest of the year.
The software business has great trajectory, indeed, there’s the kernel of a real opportunity there. But the drop in hardware is simply too big; it extinguishes the positive energy from the smaller but growing segment of the company. BlackBerry’s smartphone business is more or less dead, but until it’s buried, the continual missing of expectations will hinder BBRY stock going forward.
BBRY Stock: Verdict
There’s some good stuff going on with BlackBerry. John Chen’s tenure has gotten off to a rocky start, but he’s a great leader. With time, there’s good reason to think he can finally right the ship. The software business has real potential, especially if QNX for autos hits the sort of trajectory that seems likely now.
But for 2016, BlackBerry’s eroding hardware business will continue to overshadow any and all positive developments. Until hardware is finally dead and buried, it will be hard for investors to overlook the losses there and appreciate BlackBerry for the things it is doing correctly.
At the time of this writing, Ian Bezek had no position in any stocks mentioned. You can reach him on Twitter at @irbezek.
