Blackberry (NYSE:BB), the Canadian cybersecurity, safety and data privacy solutions software and services company, has an inflated $6.16 billion market capitalization. This is too high for a company that produced non-GAAP revenue for the third quarter of fiscal 2021 of just $224 million. BB stock is likely fairly valued but could continue dropping from its price.
On an annualized basis, Blackberry’s revenue for the year ending February 2021 is forecast at $947 million. Moreover, analysts expect just $1.04 billion over the following year.
Valuation Issues
That puts BB stock on a forward price-to-earnings multiple of 6 times revenue for the year ending Feb. 2021 and 5.92 times for 2022.
These are very high ratios, especially for a company that does not make very much money. For example, Blackberry made just $11 million on an adjusted net income basis in the quarter ending Nov. 30. That works out to just $44 million on an annualized basis.
Moreover, analysts forecast just 18 cents per share for the year ending Feb. 2021. That means that BB stock trades for a very high ratio of 60 times earnings.
That would be fine for a fast-growing company. But that is not what Blackberry really is. For example, revenue this year ending February 2022 will be just 9.8% higher.
Moreover, earnings per share (EPS) is forecast to be lower at 15 cents vs. 18 cents expected this year. These are not indicative of a fast-growing company that would deserve a 6 times revenue multiple.
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.
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%.
Therefore, since BB stock has a market value of $6.1 billion, it is now fairly valued. This gives it a value of $10.14 per share. I previously argued that the stock would fall to its fair value and this is what ended up happening.
What to Do With BB Stock
The problem is BB stock could still end up falling. It was the beneficiary of a short-squeeze last month that made it spike to over $25 at the end of January. After falling to $11.55, the stock rose to $13.76 at the beginning of February. Since then, BB stock has been dropping.
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 $8.64, or about 11.9% below today’s price.
Moreover, Marketbeat reports that nine analysts have a consensus price target of just $6.75, or more than one-third below today. Yahoo Finance has an average price target from eight analysts of just $7.69 per share, or 24% lower.
These target prices have been slowly rising. For example, if you look at my article last month, the target prices from these analysts were higher.
The fact that I use a 2% FCF margin is somewhat arbitrary. As I mentioned last time, I do not believe that a lower FCF yield is warranted just yet. If the company’s FCF continues to grow quickly then it might be justified to lower the FCF yield. That would act to give BB stock a much higher valuation.
For example, even with a 1.5% FCF, the $120 million in forecast FCF is worth $8 billion. That is 31.1% higher than today’s price. That would give BB stock a fair value price of $13.25 per share. This is a potential valuation if we can forecast a higher growth rate for FCF next year. But for right now I am sticking with its 10.14 per share target price.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
