BlackBerry (NYSE:BB) stock is up 77% in the past month and more than 102% year-t0-date, even after falling a good deal from its recent highs. The market has suddenly turned bullish on BB stock, despite its paltry growth prospects.
That’s what happens when your stock gets caught up in a short-squeeze frenzy. Eventually BB stock will float down to lower levels that represent more rational expectations for its near-term future.
BlackBerry now touts itself as a cybersecurity, safety, and data privacy solutions software and services company, instead of the telecom company handset company in the past. It provides endpoint security management, encryption, and embedded systems mainly related to autos.
But the problem is that now BB stock has a $7.74 billion valuation. This far outpaces its forecast revenue for the year ending February 2021 of $943 million. Next year’s revenue is forecast to grow to just $1.03 billion, according to analysts surveyed by Seeking Alpha.
That puts BB stock on a forward price-to-sale multiple of 8.2 times this year and 7.5 times next year’s sales. These are very high ratios, especially for a company that does not make very much money.
For example, estimates for this year’s earnings per share (EPS) are just 18 cents. That puts its price-to-earnings (P/E) on a very high 76.4 multiple, at the Feb. 10 price of $13.08.
However, estimates for the year ending February 2022 project EPS will be just 15 cents per share and 14 cents for the next year. This means that the forward P/E ratio is actually higher at 89 times and 94 times for the next two years.
One thing going for the company is that it is producing solid free cash flow (FCF). In the last two quarters, the company made $29 million and $28 million respectively in FCF. This was despite the company’s negative net income performance.
We can use this to estimate its value going forward. Assuming an average of $28.5 million in FCF each quarter, BlackBerry’s run-rate FCF is $114 million. Now, assuming a 5% growth rate in revenue and margins, the earnings power of the company in terms of FCF is $120 million.
Therefore, at a 2% FCF yield, which is probably stretching its value parameters, the market cap should be $6 billion. This is seen by dividing $120 million by 2%.
Since its market cap on Feb. 10 was $7.74 billion, the stock is overvalued by 22.48% ($7.74 billion/$6 billion). This means it is worth $10.14 per share (i.e. 77.5% of its price of $13.08 per share).
However, it would be worth $8 billion if the market gave BB stock a 1.5% FCF yield valuation. This is probably too much. If BlackBerry was in a super growth mode right now this might be an appropriate valuation metric. Like I said, even using a 2% FCF yield metric is probably stretching things for BB stock.
What to Do With BB Stock
TipRanks has a survey of four analysts who produced 12-month price targets on BB stock in the last three months. The survey says the average price target of these analysts is $8.13, or about 37% below the Feb. 10 price.
Moreover, Marketbeat reports that nine analysts have a consensus price target of just $6.25, or more than 52% below the Feb. 10 price. Yahoo Finance has an average price target from eight analysts of just $7.44 per share, or 43% lower.
I am not necessarily saying that you should always sell a stock if analysts as a group have lower price targets. They often are reluctant to raise their price targets when a company starts performing better.
But in this case, I agree. Especially since despite its free-cash-flow projections, I just can’t bring myself to lower its FCF yield below 2% annually.
I suspect most investors will want to wait to see how their fourth-quarter earnings (ending Feb. 28) and outlook turn out. The results probably won’t come out until early April or late March. If the company’s FCF turns out to be moving up and its run-rate FCF is forecast higher than $120 million, then a revaluation might be in order. Until then, I suspect BB stock will drift lower to around $10 per share.
On the date of publication, Mark R. Hake does not hold a long or short position in any of the stocks in this article.