BlackBerry Ltd (NASDAQ:BBRY) stock got off to a red-hot start this year, with the shares gaining over 60%. No doubt, a big key was the unexpected windfall from the lawsuit with Qualcomm, Inc. (NASDAQ:QCOM) that resulted in $940 million payout. But unfortunately, the rally in BBRY stock has recently come undone.
It certainly did not help that the latest earnings report was far from inspiring. There was also a string of bearish analyst reports.
Yet is all this really just short-term noise? Perhaps there is an opportunity here for investors to buy BBRY stock on the pullback?
The Story Behind BlackBerry Stock
Maybe. It is true that CEO John Chen has done a standout job since he came on board in late 2013. Let’s face it, the company was reeling from the onslaught of Apple Inc. (NASDAQ:AAPL) and Samsung Electronic (OTCMKTS:SSNLF).
So Chen took swift action, which not only involved deep cuts but also the transformation of the company. To this end, he focused on the enterprise software market — with a focus on mobile, autos and cybersecurity — and it outsourced the smartphone business.
Yet despite all this, there remain few signs that the turnaround is getting traction. Note that for the fiscal first quarter, revenues plunged by 41% to $235 million and adjusted earnings came to only 2 cents a share. As for the software business, it is not growing fast enough. During the latest quarter, the revenues rose by 12.7% to $160 million.
So what’s going on here? Well, a key factor for BBRY stock is the fierce competitive landscape. For the most part, the company does not have the resources to put up a fight. What’s more, it does not help that the Blackberry brand is fairly tarnished. This is particularly troublesome since enterprise software is often mission-critical for customers.
A recent analyst report from Goldman Sachs’ Gabriela Borges highlights this. She writes: “we believe the enterprise mobility market is becoming incrementally more competitive, in part due to bundling from larger suite providers, and in part due to growth from non-regulated industries, where BlackBerry’s product is less well positioned.” In light of the issues, Borges put a price target of $8.50 on BBRY stock.
Keep in mind that just some of the rivals in the enterprise mobility market include biggies like Citrix Systems, Inc. (NASDAQ:CTXS) and VMware, Inc. (NYSE:VMW). But of course, BBRY faces major pressures in other critical markets. For example, in the auto category, there are players like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT). And yes, AAPL appears to be eyeing the market.
Oh, and there are also a variety of free open source platforms. Keep in mind that Toyota Motor Corp (ADR) (NYSE:TM) recently dropped BBRY in favor of one such provider, Automotive Grade Linux.
Bottom Line on BBRY Stock
Even if BlackBerry can successfully battle the competition, the process will likely take a considerable amount of time. This is especially the case for autonomous vehicles as the market is still in the early phases and generally has long sales cycles.
Besides, the valuation on BBRY stock is not necessarily cheap either. Consider that the shares traded at over 4 times revenues, which is steep for a company whose top line is shrinking.
Now all this is not to imply BlackBerry stock is headed for oblivion. The balance sheet is rock-solid, with a cash balance of nearly $2 billion. The company plans to use this for aggressive share buybacks and acquisitions.
However, for BBRY stock to have sustainable gains on the upside, there will need to be more. In other words, the company must show that the turnaround is in full swing. And unfortunately, it looks like this could still be far off.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.