It’s the beginning of a new era for BlackBerry Ltd (NASDAQ:BBRY). The company that once dominated the smartphone space has ceased internal production. Going forward, the value of BlackBerry stock depends far more on the company’s software and services business. The question, as far as BBRY stock goes, is whether that’s a good thing.
The outsourcing of production to overseas partners helps, from a financial perspective. BlackBerry earnings should improve, if only because of the drag on profits created by the company’s multi-year quest to turn its handset business around. Cash flow will benefit from lower working capital needs.
It helps from a narrative perspective, too. The constant efforts to somehow take market share back from Alphabet Inc’s (NASDAQ:GOOGL, NASDAQ:GOOG) Android ecoystem and Apple Inc.’s (NASDAQ:AAPL) iPhone reeked of desperation and created the perception of BBRY stock as a failed business.
A software-focused BlackBerry, on the other hand, will be judged on its own merits. It won’t be constantly compared to the glory days when the company still was known as Research in Motion.
Those benefits aside, the question is whether the software business is strong enough to support further upside for BlackBerry stock. I’m not yet convinced on that front. But, even as a long-time BBRY bear, I’ll admit BlackBerry, at the least, has a shot.
BlackBerry Stock Is Now a Growth Stock
What’s somewhat ironic about the shift for BlackBerry is that it turns BBRY into a growth stock, rather than a value play. BBRY traded under book value for several years earlier this decade. BlackBerry stock bulls have long touted the company’s cash balance as a bulwark against further declines. BBRY looked like a “cheap option” on a turnaround. If the company could get just one more hit in phones, and gain just a few points of market share, the argument went, the stock was all upside and limited downside.
BlackBerry still has that cash balance, too. Pro forma for the $815 million rebate coming from QUALCOMM, Inc. (NASDAQ:QCOM), BlackBerry has approximately $1.9 billion in cash, or about $3.30 per fully diluted share. That would seem to protect downside in BBRY stock, at least somewhat.
But, a $4.9 billion market capitalization still leaves the company with an enterprise value of roughly $3 billion. And, as service access fees head toward zero, BlackBerry’s software revenue has to support that value. Software and service revenue was $622 million in FY17, and was guided up 13%-15% this year coming out of Q4. In other words, BBRY stock now trades at more than 4x software revenue on an enterprise basis — a true growth stock multiple.
That’s not a huge multiple in the software space, to be sure. Even FireEye Inc (NASDAQ:FEYE), one of the weaker plays in the security space, trades at about 3x EV/revenue. But, the EV/revenue multiple shows that investors are expecting reasonably significant growth from the software division.
Can Software Grow?
This is why I remain rather skeptical of BlackBerry stock.
The security business is doing nicely, but I’m doubtful it merits a premium revenue multiple. Earnings are guided positive for FY18, but only modestly so. CEO John Chen said on the Q4 call that he was “generally comfortable” with analyst consensus for FY18. The Street currently expects just 2 cents in non-GAAP EPS, or roughly $10 million-$12 million in net income. This from a company that issued $60 million worth in stock (excluded from those non-GAAP calculations).
That’s not a profitable company, but rather a company funding modest earnings and free cash flow with dilutive stock issuance. And, it means that the software division needs to grow revenue and drive operating leverage for several years to support the current value.
It also means that BBRY stock isn’t “cheap.” It’s not a value play, either. Again, BlackBerry stock is a growth stock and, so far, I’m skeptical of the company’s ability to drive the growth needed to support even $9.
The security business is doing well, but it’s in a brutally competitive space. However, the company has also touted its work in autonomous driving. But, should investors really bet that a combination of BlackBerry and Ford Motor Company (NYSE:F) is going to beat Apple, Uber, Alphabet, and Tesla Inc (NASDAQ:TSLA)? The “infotainment” aspects of QNX Software — like its powering of Ford’s SYNC platform — are nice. But, BlackBerry already has nearly half the market, and auto sales appear to be near a peak, at least in the U.S.
Same Old BlackBerry?
Investors expecting BBRY stock to return to double digits are putting a lot of pressure on the company’s software business. There simply isn’t enough evidence to bet on that business providing the growth needed to do so.
Further, I don’t think BlackBerry has earned anywhere near the level of trust to expect it to win, no matter how ardent BBRY stock bulls remain. BlackBerry is still a failed company, and a declining company. That might change going forward, but I see no reason to bet on that change just yet.
As of this writing, Vince Martin has no positions in any of the aforementioned securities.
