BlackBerry (NYSE:
BB) reported great first quarter results, and its fundamentals are wonderful on every front. BlackBerry stock is way more solid than it appears.
But many bean counters on Wall Street appear to have been scared off by the company’s fiscal 2019 software and services revenue guidance, as well as an 18% drop in the company’s software revenue last quarter.
But both of the declines in BlackBerry stock were in all likelihood caused not by any fundamental issue, but by an accounting change.
Specifically, the guidance and the software revenue appear to have been disappointing due to the company’s switch to a subscription model.
Judging by the sharp decline in BlackBerry stock on Friday, some investors who focus on short-term numbers were scared off by the results.
Longer term investors should buy BlackBerry stock, as the company’s strong fundamentals will, sooner rather than later, propel the company’s results much higher.
A Closer Look at BlackBerry
The IT security company revealed that about 86% of its software and services revenue (excluding IP licensing and professional services) billings are now recurring.
That means they are long-term deals that will continue to generate revenue.
BlackBerry also reported that its enterprise channels i.e. the number of resellers trying to sell its products and services to companies, had surged 32% versus the same period in 2018.
All of this data bodes extremely well for the company’s medium term and l0ng-term outlook. Taken together with the company’s previous disclosure about its QNX operating system being in 120 million vehicles, up from 60 million three years ago, the data shows that BlackBerry’s future is extremely bright.
The Bad Rap on BlackBerry Stock
But, as I mentioned earlier, some investors apparently have decided to focus on the company’s lower than expected guidance and the decline in its software revenue.
This probably represents the revenue that the company would have recognized last quarter under its old accounting system but had to defer due to the new accounting rules.
It makes perfect sense that a switch to subscription revenue could temporarily cause year-over-year revenue growth to slow.
That’s because instead of new customers making a large, up-front payment, they will be paying a much smaller, monthly fee.
As Growth Investor explains:
“Replacing the big upfront licence with a lower annual subscription means year one revenues fall, but subsequent years are higher. This means the (software-as-a-service) model is usually more profitable after around four years, and the lifetime value of a customer is higher.”
In other words, in the first year, the switch to subscription revenue will cause BlackBerry’s revenue to drop, but thereafter the switch will cause its revenues to rise.
Moreover, there is a very good chance that BlackBerry wanted to be cautious with its guidance so that it does not miss expectations in the future, causing the Street to mistrust it and leading to a really huge decline in the stock.
Also worth consideration is the huge number of institutional investors that have piled into BlackBerry stock in recent months. Many have sold some of their shares of BlackBerry after the surge that occurred in May and early June, and some bought short-term options on Blackberry.
But the large number of gigantic institutional investors who have meaningfully added to their holdings of Blackberry is quite impressive.
To name just a few, Royal Bank of Canada bought nearly 500,000 shares, Vanguard bought around 550,000 more shares, Citadel Advisors bought over 180,000 more shares, and Sumitomo Mitsui disclosed bought more than 600,000 more shares.
If BlackBerry did not have a tremendously positive long-term outlook, these huge institutional investors would not be buying so many more shares. They are ignoring the unfounded worries about BlackBerry’s short-term numbers, and so should you.
As of this writing, Larry Ramer owned shares of BlackBerry stock.
Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.
