Even the best companies aren’t worth buying at outrageous prices due to the fact that investors’ returns are inexorably linked to the purchase price of the underlying securities at any given time. The argument that shares of BlackBerry Ltd. (TSX:BB)(NYSE:BBRY) are now approaching a “value” level is an interesting one, one which I want to take a look at, specifically focusing on the fact that the newly redesigned software company has begun to turn a profit.
I’ve written at length about some of the risks and concerns I have with the, what I believe to be, outrageous target prices set by certain analysts for BlackBerry, such as Andrew Left at Citron Research. While some of the hype may be warranted, I want to look at just how much value investors might see in BlackBerry, given its near-30% dip from the company’s 52-week peak, following the release of the aforementioned report.
Let’s take a look under the hood, shall we?
Fundamentals
BlackBerry’s shift toward becoming a 100% software-focused firm has shown through in the year-over-year financials we see for the full year 2017. The company’s gross margin has continued to improve, due largely to the shift made from hardware toward a 100% software and licensing business model, realized over the past year or so (the company has officially licensed out its hardware business, allowing the management team to focus on generating value through software only). The corresponding margin growth year-over-year is notable, from 38.5% in Q1 last year to 63.8% in the same quarter this year.
The decline in quarterly revenue from US$400 million last year to only US$235 million this year has been concerning for investors, given the large investments made in the company’s QNX software and the autonomous vehicle sector (the company has already invested more than $100 million in this sector). That said, excluding special items (the US$815 million Qualcomm settlement, fair value adjustments made to the company’s debentures, and losses on the sale of long-term assets), the company’s adjusted net loss of -$60 million really isn’t that bad, considering the growth prospects the business is finally showing in the software space.
According to my calculations, assuming the company is able to maintain its cost base and gross margin level, the business will need to grow revenues by approximately 18.3% to break even within two years, or grow its revenue by 40% over the next year, to see break-even status.
Bottom line
BlackBerry may turn out to be a value play, however my model indicates the price would need to drop substantially in order for me to consider this stock, or the company’s revenue growth rate would need to do a 180-degree turn, or both.
Investors banking on a massive turnaround in terms of BlackBerry’s ability to churn out revenue may want to take a look at this company down the road, assuming the business begins to pick up growth momentum. My worry is that even with the business redesign, CEO John Chen may not be able to do enough to revive the firm and bring it back to its former status as a growth king.
Stay Foolish, my friends.
