Blackberry (NYSE:BB) reported a disappointing quarter ending May 31 on June 24, but investors in BB stock should not worry about its underlying value. Revenue was lower than last year and the prior quarter but its net losses improved significantly from both periods. I believe that BB stock is still worth between $17.93 and $20.91 as I argued in my last article on Blackberry.
But the stock market is having none of this, given the miserable results. No one likes to see a public company post lower results, even if the losses improved. So for right now, BB stock is stuck in a range and trades just below $10 at $9.88, as of Aug. 13.
And just like the old phrase, “Buy on rumor, sell the news,” BB stock ran up to $15.88 as of June 3, and by the time the news hit on June 24, it was already down to $12.68. Now it’s fallen further to below $10.00. Let’s look at some reasons why and then see what BB stock is worth.
Blackberry has been trying to grow its intelligent security software and services to enterprises and governments worldwide. It focuses on automotive software. As a result, it collects royalties from various car manufacturers.
For example, its QNX software is now used in over 195 million vehicles worldwide, including recently new Volvo vehicles. It provides safety-certified embedded software for several functions like advanced driver assistance systems (ADAS), digital cockpits, and secure data gateways. These are all becoming increasingly prevalent in vehicles.
Despite posting lower losses, the most disappointing figure was its negative free cash flow (FCF). For example, in the three months to May 31, cash flow from operations (CFFO) was negative $33 million. This can be seen on page 7 (“Consolidated Statement of Cash Flows”) of its financial results for Q2. After deducting another $2 million for capex spending, the FCF cash burn was negative $35 million.
However, in Q4 ending Feb. 28, 2021, the company had a positive FCF of $49 million, according to Seeking Alpha ($52 million of CFFO less $3 million in capex spending). It also shows that Blackberry has had 8 full quarters of positive FCF, except for its last three Q1 periods ending May. In other words, this is a seasonal issue and can be overlooked.
The bottom line is that Blackberry is developing a royalty stream from its patents from embedded software with electric vehicles and newer gas-powered models. In the end, the stock could end up with a similar business model as Qualcomm (NASDAQ:QCOM) has with its royalties in the telecom business.
That is why BB stock will be worth so much in the future as more automotive manufacturers use its software.
What BB Stock Is Worth
In my June article on Blackberry, I used a 23.33% FCF margin to estimate its future FCF and then divided that by 1.5% to derive its FCF yield target value. The margin number came from its Q4 results. We will stick with that.
However, according to Yahoo! Finance, which uses Refinitiv survey data from analysts, revenue for the year ending Feb. 2023 will be $974 million. That is higher than the $954 million using Seeking Alpha data. So, let’s use the average of these two, or $964 million. Multiplying that number by 23.33% derives an FCF estimate of $225 million. And just to be conservative, especially since every Q1 seems to be negative, let’s lower that margin estimate to 20%. That results in an FCF figure of $193 million.
Now, if we divide $193 million by the FCF yield metric of 1.5%, we get a target value of $12.867 billion. Even using a 2% FCF yield results in a target market value of $9.65 billion, which is 72% higher than today’s market cap of $5.6 billion. In fact, at a 2.5% FCF yield, the target value is $7.72 billion, or 37.8% over today’s price.
So, our best conservative valuation guess is that BB stock is worth between 38% and 72% higher than its price today of $9.88 (Aug. 13). That puts the target price between $13.63 and $17.00, or $15.32 on average, or 55% higher than today.
What To Do With BB Stock
As Blackberry’s patent royalty portfolio continues to grow, the company’s value will continue to climb, despite seasonal losses. It probably makes sense, then, for value-oriented investors to begin accumulating BB shares, especially while the stock is off its peak.
My best guess is that it is worth about $15.32, 55% above today’s price, but could be as high as $17.00 per share. Even if it takes 2 years for the stock to rise to that level, its average annual compound return will be 24.5% each year. That is a pretty satisfactory return for most investors.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.