On Jan. 27, BlackBerry (NYSE:BB) traded as high as $28.77 before plunging sharply. The influx of buying the most short-sold stocks gave BB stock a temporary lift. Investors need to look beyond that one-time event.
Retail buyers on Reddit’s r/WallStreetBets may center their buying around other specific stocks instead. So, BlackBerry’s fair value will rise if the company turns its fortunes around.
BB Stock Lifted as Smartphone Connection Fades
Anyone investing in smartphone device suppliers will not take another look at BlackBerry shares. Investors will buy Apple (NASDAQ:AAPL) instead. Suppliers like Qualcomm (NASDAQ:QCOM) also have strong prospects.
After BlackBerry shed its smartphone division, it built its software division. It doubled its efforts in the autonomous driving segment. Plus, it pivoted toward cybersecurity solutions when it acquired Cylance.
None of those efforts have lifted revenue just yet. In the third quarter, it posted on Dec. 17 2020 a GAAP operating loss of $127 million. This is due mostly to a value adjustment to long-term debt. On a non-GAAP basis, the company earned $14 million. Non-GAAP revenue fell by around 20% to $224 million.
Growth in Vehicle Data Platform
On Dec. 1, 2020, BlackBerry announced a multi-year global deal with Amazon (NASDAQ:AMZN) to develop BlackBerry’s Intelligent Vehicle Data Platform. Since vehicles are getting an increasing volume of technology and complexity, the partnership should finally pivot BlackBerry towards growth. The platform will let automakers have a way of securely reading vehicle sensor data.
BlackBerry’s IVY is a powerful platform. It will support multiple vehicle operating systems. With multi-cloud deployments, it will have compatibility across vehicle brands and models. By offering an agnostic operating system through QNX, automakers may get plenty of capabilities.
For example, BlackBerry IVY may recognize icy road conditions. It may then recommend that the driver activate the vehicle’s safety features. Furthermore, IVY may share the vehicle’s travel plans with a charging network. That way, the charging network will adjust the charging time as required.
Last month’s patent royalty settlement is another positive development for BlackBerry. In 2018, BlackBerry sued Facebook (NASDAQ:FB) for using its inventions from its popular message applications. The reported settlement removes a previously ongoing distraction. Plus, BlackBerry will get some much-needed cash. It may invest the settlement in its IVY business and spend on research and development to strengthen the Cylance product.
Analysts are cool on BlackBerry’s prospects, rating the stock as either a “hold” or a “sell.” More recently, analysts from Scotiabank and RBC Capital both rated the stock as a “sell,” according to Tipranks. A five-year discounted cash flow growth exit model would validate this negative view.
The following DCF and perpetuity growth rate would suggest a fair value of around $8:
|Discount Rate||9.5% – 8.5%||9%|
|Perpetuity Growth Rate||3.5% – 4.5%||4%|
|Fair Value||$6.80 – $9.66||$7.95|
The above model is a pessimistic view on BlackBerry’s future growth. Management may easily negate the downside target by posting a rebound in revenue. Alongside Amazon’s AWS solution, the automotive segment offers promising growth for BlackBerry investors.
The short-squeeze on BB stock did not last long because the short float ratio is too low. In the high single digits, bears may cover the position quickly. Still, if Robinhood restricts trading in select stocks that include BlackBerry, shares could rise sharply.
Investors are better off not paying attention to the short-term noise in the market today. The company is in a multi-year turnaround. Investing in it requires tremendous levels of patience. This will pay off if management accelerates revenue from cybersecurity, through Cylance, and with its Amazon partnership. This plan is not without risk. Another poor quarter will pressure shares to the downside.
BlackBerry is a stock to watch for now.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.