BlackBerry Ltd (BBRY) Stock: The Competition Is Closing In

BBRY - BlackBerry Ltd (BBRY) Stock: The Competition Is Closing In

At the start of the year, it looked like BlackBerry Ltd (NASDAQ:BBRY) was finally getting traction with its turnaround efforts as the shares jumped from $7.10 to $11.39. But unfortunately, the good times would not last long. The problem? Well, it was the fiscal first quarter report. And unfortunately, it looks like the sub-par performance was not a one-off. BBRY stock is likely to continue to lag for some time.

BlackBerry BBRY

So here’s what happened during the quarter: Revenues plummeted 41% to $235 million and adjusted earnings came to 2 cents a share. While the profits beat the Street consensus, there was a miss on the top line. Note that analysts were projecting $264.5 million.

But when diving deeper into the results, you’ll see that about 30% of the company’s revenues are in free-fall. Yes, they are a part of the legacy segments from the hardware business, which got obliterated by Apple Inc. (NASDAQ:AAPL) and SAMSUNG ELECTRONIC (OTCMKTS:SSNLF).

During the quarter, the revenues of handheld devices plunged by 76% to $37 million and Service Access Fees (SAF) fell by 64% to $36 million. Now it’s true that BBRY has outsourced its hardware business to a low-cost producer in China. Yet this move will likely not make up for the revenue short-fall, as licensing fees are only a fraction of the value of a device.

OK, but what about the enterprise software business? Perhaps this will pump-up revenues and get BBRY stock back on track? Maybe not. Consider that the strategy has been sputtering. In Q2, the enterprise segment was far from robust, with revenues dropping by 4.7%. BBRY blamed this on accounting issues with the Good Technology acquisition and a drop in professional services. But then again, it is important to keep in mind that the enterprise software industry is tough. The sales cycles can take months and there are well-heeled competitors. For example, in the mobile software category, BBRY must contend with operators like VMware, Inc. (NYSE:VMW) and Citrix Systems, Inc. (NASDAQ:CTXS).

Even the automotive business has been lackluster, with a quarterly increase of about 2.9% to $36 million. The segment includes the car operating system, called QNX, as well as Radar (which is for asset tracking), Paratek (antenna tuning) and Certicom (security).

Yet the fact is that BBRY does not have the resources to ward off competitors in the auto sector, such as Alphabet Inc (NASDAQ:GOOGL), Intel Corporation (NASDAQ:INTC) and QUALCOMM, Inc. (NASDAQ:QCOM). It is also not helpful that the BlackBerry brand is tarnished. This is particularly challenging in a crowded market.

Bottom Line On BBRY Stock

Now the downside on BBRY stock could be limited. A key reason is the recent $940 million windfall from the arbitration award against QCOM. Because of this, BBRY has a net cash position of $1.9 billion, which represents a hefty 40% of the market cap. The company also has plans to buy back 31 million shares or about 6.4% of the float.

But this does not necessarily mean that BBRY stock is a good investment either. The valuation is still far from cheap, with the shares trading at 4 times revenues. And yes, Wall Street analysts are also tepid, with the average price target at about $9.67. This implies upside of a mere 4%.

Here’s what Goldman Sachs Group Inc (NYSE:GS) analyst Gabriela Borges recently noted: “However, with the auto business trading at an implied 13-17X revenue, and unlikely to ramp meaningfully until 2019, we think fundamentals will be the primary driver of the stock over the next 12 months. On this point, we see risk to 2HFY18 and FY19 estimates given the Street modeling a sharp inflection, and increasing competition in EMM (enterprise mobility management).”

In other words, the turnaround of BBRY still has a long way to go — which means that there may be few catalysts to get the shares into the bull phase.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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