BlackBerry Ltd (NASDAQ:BBRY) has had an impressive couple of months. BlackBerry stock has gained more than 45% just since the beginning of April, boosted by a torrent of good news. An $815 million judgment against Qualcomm, Inc. (NASDAQ:QCOM) sent BBRY stock up 18%. (The payout was later upped to $940 million.)
Investors are showing increased optimism about BlackBerry’s role in autonomous driving, centered around its QNX software. Even short-seller Citron Research turned bullish on BlackBerry, comparing it to Nvidia Corporation (NASDAQ:NVDA) shares and setting a $20 price target.
Amazingly, this entire move in BBRY stock includes the roughly 9% decline sparked by disappointment in its quarterly earnings report at the end of last week. However, given what we learned, it might be time for additional caution at these levels.
BlackBerry stock has a viable long-term investment case for the first time in many years. But bulls need to have patience, and bear in mind a few key risks.
BlackBerry Is a Growth Stock Right Now
BlackBerry’s exit from hardware has changed its revenue profile rather dramatically.
Since the shares in what was then known as Research in Motion tanked after BlackBerry lost the smartphone war to Apple Inc. (NASDAQ:AAPL), BBRY stock generally was considered a value play. It had a huge cash balance. It generated decent cash flow (at least until the last few years). And BlackBerry had the chance to break the stranglehold the iPhone and Alphabet Inc’s (NASDAQ:GOOGL) Android system had on the smartphone market.
BlackBerry still has that cash — and more of it, thanks to Qualcomm. But earnings are minimal.
In its Q1 reported last Friday, BlackBerry earned just 2 cents per share on revenues of $235 million. Analysts now forecast 2 cents in EPS in fiscal 2018 (ending February). CEO John Chen said on the Q4 FY17 conference call a few months ago that he was “generally comfortable” with that figure. Service access fees generated from hardware subscriptions are sliding to zero, further pressuring sales and earnings over the next few quarters. Revenue should decline in FY18, and possibly FY19 as well.
That doesn’t mean BBRY stock will head to zero itself — or even back to the single digits. But investors need to remember this is a very different investment case. The business going forward is based on the software and service segment, where the company guided revenue to come in around roughly $700 million in FY18. That suggests a 5x+ EV/sales multiple, given an enterprise value of more than $4 billion.
That’s not cheap, even considering the opportunity in automotive. And that opportunity still remains a few years out.
BlackBerry Stock as an Autonomous Driving Play
As such, BBRY stock might see a bit more volatility than its shareholders are used to. NVDA — the stock to which Citron compared BBRY — is a useful comparison in that regard. It’s true that NVDA has risen parabolically of late, rising roughly 10x from its early 2015 levels. But there have been some big downside moves as well, notably early this year solely due to analyst downgrades.
Similarly, a change in investor sentiment can have a swift impact on BlackBerry stock. That seems particularly true after an earnings report where optimism and expectations were high, but results were muted.
From a long-term standpoint, BlackBerry’s success in automotive is far from guaranteed. It recently lost a major customer in Toyota Motor Corp (ADR) (NYSE:TM). Management said the decision by Toyota to move to open-source software wasn’t a surprise, and that the company wasn’t worried about losing share in so-called ‘infotainment’ capabilities. But infotainment is where BlackBerry currently has its market share — and a large chunk of its revenue.
As it moves into safety and autonomous driving, BlackBerry will face stiff competition, which will come from startups and tech giants. Apple, Alphabet, and Tesla Inc (NASDAQ:TSLA) all will focus on the same market.
As Citron pointed out, that competition didn’t stop Intel Corporation (NASDAQ:INTC) from acquiring Mobileye NV (NYSE:MBLY). But that competition also means BlackBerry’s success is far from guaranteed. That $15 billion deal is now delayed until next month as the companies are still awaiting rulings from various tax and antitrust regulators.
A Long-Term Case With Near-Term Potholes
Again, there is a case for BBRY stock longer-term. But it’s a riskier case than some investors might believe at the moment.
The automotive opportunity is years off, with a number of developments yet to play out. BlackBerry’s recent history makes the stock a bit of a “show me” story at this point. Friday’s earnings disappointment could undercut the optimism of the past few weeks.
Beyond BlackBerry’s market positioning, the hype surrounding autonomous driving looks as if it has gone too far. NVDA has soared. InvestorPlace contributor Brian Wu argued recently that the valuation of Alphabet’s Waymo unit looks far too optimistic.
Self-driving technology may be available in a few short years. But regulators will have their say. So will customers, who may not be willing to cede control of their cars. And along the way, it seems likely that U.S. automobile sales, at least, will be declining.
There’s simply a lot of optimism behind autonomous driving at the moment. That optimism is being priced into BlackBerry stock. But with BBRY up 50% in less than three months, any short- or long-term risks aren’t priced in.
That seems to make BBRY stock a little dangerous at the moment.
As of this writing, Vince Martin has no positions in any securities mentioned.